Interpretation Modern

Index

Cases

Reardon Smith Line Limited v Yngvar Hansen-Tangen (The Diana Prosperity)

[1976] 1 WLR 989, [1976] 2 Lloyd’s Rep 621, [1976] 3 All ER 570

Lord Wilberforce

‘I think that all of their Lordships are saying, in different words, the same thing — what the court must do must be to place itself in thought in the same factual matrix as that in which the parties were

…..

‘No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as ‘the surrounding circumstances’ but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.’

Investors Compensation Scheme Ltd. v West Bromwich Building Society

[1997] UKHL

Lord Hoffmann

“In the Court of Appeal, Leggatt L.J. said, on the authority of Alice Through the Looking Glass, that the judge’s interpretation was “not an available meaning of the words.” “Any claim (whether sounding in rescission for undue influence or otherwise)” could not mean “Any claim sounding in rescission (whether for undue influence or otherwise)” and that was that. He was unimpressed by the alleged commercial nonsense of the alternative construction.

My Lords, I will say at once that I prefer the approach of the learned judge. But I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, 1384-1386 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of “legal” interpretation has been discarded. The principles may be summarised as follows:

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having 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.

(2) The background was famously referred to by Lord Wilberforce as the “matrix of fact,” but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. 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. (see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 2 WLR 945

(5) 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. On the other hand, if one would nevertheless 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. Lord Diplock made this point more vigorously when he said in The Antaios Compania Neviera SA v Salen Rederierna AB [1985] 1 AC 191, 201:

If one applies these principles, it seems to me that the judge must be right and, as we are dealing with one badly drafted clause which is happily no longer in use, there is little advantage in my repeating his reasons at greater length. The only remark of his which I would respectfully question is when he said that he was “doing violence” to the natural meaning of the words. This is an over-energetic way to describe the process of interpretation. Many people, including politicians, celebrities and Mrs. Malaprop, mangle meanings and syntax but nevertheless communicate tolerably clearly what they are using the words to mean. If anyone is doing violence to natural meanings, it is they rather than their listeners.

…..

Finally, on this part of the case, I must make some comments upon the judgment of the Court of Appeal. Leggatt L.J. said that his construction was “the natural and ordinary meaning of the words used.” I do not think that the concept of natural and ordinary meaning is very helpful when, on any view, the words have not been used in a natural and ordinary way. In a case like this, the court is inevitably engaged in chosing between competing unnatural meanings. Secondly, Leggatt L.J. said that the judge’s construction was not an “available meaning” of the words. If this means that judges cannot, short of rectification, decide that the parties must have made mistakes of meaning or syntax, I respectfully think he was wrong. The proposition is not, I would suggest, borne out by his citation from Alice Through the Looking Glass.[3] Alice and Humpty Dumpty were agreed that the word “glory” did not mean “a nice knock-down argument.” Anyone with a dictionary could see that. Humpty Dumpty’s point was that “a nice knock-down argument” was what he meant by using the word “glory.” He very fairly acknowledged that Alice, as a reasonable young woman, could not have realised this until he told her, but once he had told her, or if, without being expressly told, she could have inferred it from the background, she would have had no difficulty in understanding what he meant.”

Chartbrook Ltd v Persimmon Homes Ltd & Ors

[2009] UKHL 38 (1 July 2009)

Lord Hoffmann

There is no dispute that the principles on which a contract (or any other instrument or utterance) should be interpreted are those summarised by the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912-913. They are well known and need not be repeated. It is agreed that the question is 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. The House emphasised that “we do not easily accept that people have made linguistic mistakes, particularly in formal documents” (similar statements will be found in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, 269, Kirin-Amgen Inc v Hoechst Marion Roussel Ltd [2005] RPC 169, 186 and Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279, 296) but said that in some cases the context and background drove a court to the conclusion that “something must have gone wrong with the language”. In such a case, the law did not require a court to attribute to the parties an intention which a reasonable person would not have understood them to have had.

…..

In East v Pantiles (Plant Hire) Ltd (1981) 263 EG 61 Brightman J stated the conditions for what he called “correction of mistakes by construction”:

“Two conditions must be satisfied: first, there must be a clear mistake on the face of the instrument; secondly, it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied, then the correction is made as a matter of construction.”

Subject to two qualifications, both of which are explained by Carnwath LJ in his admirable judgment in KPMG LLP v Network Rail Infrastructure Ltd [2007] Bus LR 1336, I would accept this statement, which is in my opinion no more than an expression of the common sense view that we do not readily accept that people have made mistakes in formal documents. The first qualification is that “correction of mistakes by construction” is not a separate branch of the law, a summary version of an action for rectification. As Carnwath LJ said (at p. 1351, para 50):

“Both in the judgment, and in the arguments before us, there was a tendency to deal separately with correction of mistakes and construing the paragraph ‘as it stands’, as though they were distinct exercises. In my view, they are simply aspects of the single task of interpreting the agreement in its context, in order to get as close as possible to the meaning which the parties intended.”

The second qualification concerns the words “on the face of the instrument”. I agree with Carnwath LJ (at pp 1350-1351) that in deciding whether there is a clear mistake, the court is not confined to reading the document without regard to its background or context. As the exercise is part of the single task of interpretation, the background and context must always be taken into consideration.

What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbalrearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In my opinion, both of these requirements are satisfied.

That leaves the question of the deduction of C & I, which the judge and the majority of the Court of Appeal regarded as an insuperable obstacle to Persimmon’s construction. I cannot see why this should be so. Everyone agrees that the only sum from which C & I can rationally be deducted is the headline price achieved on the sale, so as to arrive at the net amount received by Persimmon. That is accordingly what the parties must have meant. You deduct the C & I from the nominal price achieved and the ARP is the excess, if any, of 23.4% of that net sum over the MGRUV. Giving this meaning to the provision about C & I does not in any way weaken or affect the argument for interpreting the rest of the definition in a way which gives ARP a rational meaning. To say, as Rimer LJ said, that it requires “rewriting”, or that it “distorts the meaning and arithmetic of the definition” is only to say that it requires one to conclude that something has gone wrong with the language – not, in this case, with the meanings of words, but with the syntactical arrangement of those words. If however the context drives one to the conclusion that this must have happened, it is no answer that the interpretation does not reflect what the words would conventionally have been understood to mean.

If your Lordships agree with this conclusion about the construction of the contract, the appeal must be allowed. There is no need to say anything more. But Persimmon advanced two alternative arguments of veryconsiderable general importance and I think it is appropriate that your Lordships should deal with them. The first was that (contrary to the unanimous opinion of the judge and the Court of Appeal) the House should take into account the pre-contractual negotiations, which in the opinion of Lawrence Collins LJ (at paragraph 132), were determinative confirmation of Persimmon’s argument on construction. The second was that the judge and the Court of Appeal had misunderstood the principles upon which rectification may be decreed and that if Persimmon had failed on construction, the agreement should have been rectified.

The rule that pre-contractual negotiations are inadmissible was clearly reaffirmed by this House in Prenn vSimmonds [1971] 1 WLR 1381, where Lord Wilberforce said (at p. 1384) that earlier authorities “contain little to encourage, and much to discourage, evidence of negotiation or of the parties’ subjective intentions.” It is clear that the rule of inadmissibility has been established for a very long time. In Inglis v John Buttery & Co (1878) 3 App Cas 552, 577 Lord Blackburn said that Lord Justice Clerk Moncreiff (at (1877) 4 R 58, 64) had laid down a principle which was nearly accurate but not quite when he said that in all mercantile contracts “whether they be clear and distinct or the reverse, the Court is entitled to be placed in the position in which the parties stood before they signed”. The only qualification Lord Blackburn made was to reject Lord Moncreiff’s view that the Court was entitled to look at the pre-contractual negotiations because unless one did so, one could not be fully in the position in which the parties had been.

Instead, Lord Blackburn preferred (at p. 577) the opinion of Lord Gifford ((1877) 4 R 58, 69-70):

“Now, I think it is quite fixed – and no more wholesome or salutary rule relative to written contracts can be devised – that where parties agree to embody, and do actually embody, their contract in a formal written deed, then in determining what the contract really was and really meant, a Court must look to the formal deed and to that deed alone. This is only carrying out the will of the parties. The only meaning of adjusting a formal contract is, that the formal contract shall supersede all loose and preliminary negotiations – that there shall be no room for misunderstandings which may often arise, and which do constantly arise, in the course of long, and it may be desultory conversations, or in the course of correspondence or negotiations during which the parties are often widely at issue as to what they will insist on and what they will concede. The very purpose of a formal contract is to put an end to the disputes which would inevitably arise if the matter were left upon verbal negotiations or upon mixed communings partly consisting of letters and partly of conversations. The written contract is that which is to be appealed to by both parties, however different it may be from their previous demands or stipulations, whether contained in letters or in verbal conversation. There can be no doubt that this is the general rule, and I think the general rule, strictly and with peculiar appropriateness applies to the present case.”

To allow evidence of pre-contractual negotiations to be used in aid of construction would therefore require the House to depart from a long and consistent line of authority, the binding force of which has frequently been acknowledged: see Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657, 665 (“well-established and salutary”, per Lord President Rodger; Alexiou v Campbell [2007] UKPC 11 (“vouched by…compelling authorities”, per Lord Bingham of Cornhill.) The House is nevertheless invited to do so, on the ground that the rule is illogical and prevents a court from, as the Lord Justice Clerk in Inglis v John Buttery & Co (1878) 3 App Cas 552 said, putting itself in the position of the parties and ascertaining their true intent.

In Prenn v Simmonds [1971] 1 WLR 1381, 1384 Lord Wilberforce said by way of justification of the rule:

“The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience, (though the attempt to admit it did greatly prolong the case and add to its expense). It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties’ positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus. If the previous documents use different expressions, how does construction of those expressions, itself a doubtful process, help on the construction of the contractual words? If the same expressions are used, nothing is gained by looking back: indeed, something may be lost since the relevant surrounding circumstances may be different. And at this stage there is no consensus of the parties to appeal to. It may be said that previous documents may be looked at to explain the aims of the parties. In a limited sense this is true: the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact. Cardozo J. thought so in the Utica Bank case. And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can reasonably be found. But beyond that it may be difficult to go: it may be a matter of degree, or of judgment, how far one interpretation, or another, gives effect to a common intention: the parties, indeed, may be pursuing that intention with differing emphasis, and hoping to achieve it to an extent which may differ, and in different ways. The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get ‘agreement’ and in the hope that disputes will not arise. The only course then can be to try to ascertain the ‘natural’ meaning. Far more, and indeed totally, dangerous is it to admit evidence of one party’s objective – even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised.”

Critics of the rule, such as Thomas J in New Zealand (Yoshimoto v Canterbury Golf International Ltd [2001] 1 NZLR 523, 538-549) Professor David McLauchlan (“Contract Interpretation: What is it About?” (2009) 31:5 Sydney Law Review 5-51) and Lord Nicholls of Birkenhead (“My Kingdom for a Horse: The Meaning of Words” (2005) 121 LQR 577-591) point out that although all this may usually be true, in some cases it will not. Among the dirt of aspirations, proposals and counter-proposals there may gleam the gold of a genuine consensus on some aspect of the transaction expressed in terms which would influence an objective observer in construing the language used by the parties in their final agreement. Why should court deny itself the assistance of this material in deciding what the parties must be taken to have meant? Mr Christopher Nugee QC, who appeared for Persimmon, went so far as to say that in saying that such evidence was unhelpful, Lord Wilberforce was not only providing a justification for the rule but delimiting its extent. It should apply only in cases in which the pre-contractual negotiations are actually irrelevant. If they do assist a court in deciding what an objective observer would have construed the contract to mean, they should be admitted. I cannot accept this submission. It is clear from what Lord Wilberforce said and the authorities upon which he relied that the exclusionary rule is not qualified in this way. There is no need for a special rule to exclude irrelevant evidence.

I do however accept that it would not be inconsistent with the English objective theory of contractual interpretation to admit evidence of previous communications between the parties as part of the background which may throw light upon what they meant by the language they used. The general rule, as I said in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, 269, is that there are no conceptual limits to what can properly be regarded as background. Prima facie, therefore, the negotiations are potentially relevant background. They may be inadmissible simply because they are irrelevant to the question which the court has to decide, namely, what the parties would reasonably be taken to have meant by the language which they finally adopted to express their agreement. For the reasons given by Lord Wilberforce, that will usually be the case. But not always. In exceptional cases, as Lord Nicholls has forcibly argued, a rule that prior negotiations are always inadmissible will prevent the court from giving effect to what a reasonable man in the position of the parties would have taken them to have meant. Of course judges may disagree over whether in a particular case such evidence is helpful or not. In Yoshimoto vCanterbury Golf International Ltd [2001] 1 NZLR 523. Thomas J thought he had found gold in the negotiations but the Privy Council said it was only dirt. As I have said, there is nothing unusual or surprising about such differences of opinion. In principle, however, I would accept that previous negotiations may be relevant.

It therefore follows that while it is true that, as Lord Wilberforce said, inadmissibility is normally based in irrelevance, there will be cases in which it can be justified only on pragmatic grounds. I must consider these grounds, which have been explored in detail in the literature and on the whole rejected by academic writers but supported by some practitioners.

The first is that the admission of pre-contractual negotiations would create greater uncertainty of outcome in disputes over interpretation and add to the cost of advice, litigation or arbitration. Everyone engaged in the exercise would have to read the correspondence and statements would have to be taken from those who took part in oral negotiations. Not only would this be time-consuming and expensive but the scope for disagreement over whether the material affected the construction of the agreement (as in the Yoshimoto case) would be considerably increased. As against this, it is said that when a dispute over construction is litigated, evidence of the pre-contractual negotiations is almost invariably tendered in support of an alternative claim for rectification (as in Prenn v Simmonds and in this case) or an argument based on estoppel by convention or some alleged exception to the exclusionary rule. Even if such an alternative claim does not succeed, the judge will have read and possibly been influenced by the evidence. The rule therefore achieves little in saving costs and its abolition would restore some intellectual honesty to the judicial approach to interpretation.

There is certainly a view in the profession that the less one has to resort to any form of background in aid of interpretation, the better. The document should so far as possible speak for itself. As Popham CJ said in the Countess of Rutland’s Case (1604) 5 Co Rep 25, 25b, 26a:

“it would be inconvenient, that matters in writing made by advice and on consideration, and which finally import the certain truth of the agreement of the parties should be controlled by averment of the parties to be proved by the uncertain testimony of slippery memory.”

I do not think that these opinions can be dismissed as merely based upon the fallacy that words have inherent or “available” meanings, rather than being used by people to express meanings, although some of the arguments advanced in support might suggest this. It reflects what may be a sound practical intuition that the law of contract is an institution designed to enforce promises with a high degree of predictability and that the more one allows conventional meanings or syntax to be displaced by inferences drawn from background, the less predictable the outcome is likely to be. In this respect, it is interesting to consider the reaction to the statement of principle in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896,912-913, which was viewed with alarm by some distinguished commercial lawyers as having greatly increased the quantity of background material which courts or arbitrators would be invited to consider: see Lord Bingham’s recent paper (“A New Thing Under the Sun: The Interpretation of Contract and the ICS Decision” (2008) 12 Edinburgh LR 374-390) and Spigelmann CJ, “From Text to Contract: Contemporary Contractual Interpretation” (2007) 81 ALJ 322. As Lord Bingham pointed out, there was little in that statement of principle which could not be found in earlier authorities. The only points it decided that might have been thought in the least controversial were, first, that it was not necessary to find an “ambiguity” before one could have any regard to background and, secondly, that the meaning which the parties would reasonably be taken to have intended could be given effect despite the fact that it was not, according to conventional usage, an “available” meaning of the words or syntax which they had actually used.

Like Lord Bingham, I rather doubt whether the ICS case produced a dramatic increase in the amount of material produced by way of background for the purposes of contractual interpretation. But pre-contractual negotiations seem to me capable of raising practical questions different from those created by other forms of background. Whereas the surrounding circumstances are, by definition, objective facts, which will usually be uncontroversial, statements in the course of pre-contractual negotiations will be drenched in subjectivity and may, if oral, be very much in dispute. It is often not easy to distinguish between those statements which (if they were made at all) merely reflect the aspirations of one or other of the parties and those which embody at least a provisional consensus which may throw light on the meaning of the contract which was eventually concluded. But the imprecision of the line between negotiation and provisional agreement is the very reason why in every case of dispute over interpretation, one or other of the parties is likely to require a court or arbitrator to take the course of negotiations into account. Your Lordships’ experience in the analogous case of resort to statements in Hansard under the rule in Pepper v Hart [1993] AC 593 suggests that such evidence will be produced in any case in which there is the remotest chance that it may be accepted and that even these cases will be only the tip of a mountain of discarded but expensive investigation. Pepper v Hart has also encouraged ministers and others to make statements in the hope of influencing the construction which the courts will give to a statute and it is possible that negotiating parties will be encouraged to improve the bundle of correspondence with similar statements.

Supporters of the admissibility of pre-contractual negotiations draw attention to the fact that Continental legal systems seem to have little difficulty in taking them into account. Both the Unidroit Principles of International Commercial Contracts (1994 and 2004 revision) and the Principles of European Contract Law (1999) provide that in ascertaining the “common intention of the parties”, regard shall be had to prior negotiations: articles 4.3 and 5.102 respectively. The same is true of the United Nations Convention on Contracts for the International Sale of Goods (1980). But these instruments reflect the French philosophy of contractual interpretation, which is altogether different from that of English law. As Professor Catherine Valcke explains in an illuminating article (“On Comparing French and English Contract Law: Insights from Social Contract Theory”) (16 January 2009), French law regards the intentions of the parties as a pure question of subjective fact, their volonté psychologique, uninfluenced by any rules of law. It follows that any evidence of what they said or did, whether to each other or to third parties, may be relevant to establishing what their intentions actually were. There is in French law a sharp distinction between the ascertainment of their intentions and the application of legal rules which may, in the interests of fairness to other parties or otherwise, limit the extent to which those intentions are given effect. English law, on the other hand, mixes up the ascertainment of intention with the rules of law by depersonalising the contracting parties and asking, not what their intentions actually were, but what a reasonable outside observer would have taken them to be. One cannot in my opinion simply transpose rules based on one philosophy of contractual interpretation to another, or assume that the practical effect of admitting such evidence under the English system of civil procedure will be the same as that under a Continental system.

Rainy Sky SA & Orsd v Kookmin Bank

[2011] UKSC 50 [2012] BLR 132, 138 Con LR 1, [2012] ICR 1, [2011] CILL 3105, [2012] 1 All ER (Comm) 1, [2012] 1 All ER 1137[2012] 1 Lloyd’s Rep 34, [2011] WLR 2900, [2011] 2 CLC 923, [2012] Bus LR 313, [2011] 1 WLR 2900,

Lord Clark

The correct approach to construction

For the most part, the correct approach to construction of the Bonds, as in the case of any contract, was not in dispute. The principles have been discussed in many cases, notably of course, as Lord Neuberger MR said in Pink Floyd Music Ltd v EMI Records Ltd [2010] EWCA Civ 1429; [2011] 1 WLR 770 at para 17, by Lord Hoffmann in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, passim, in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912F-913G and in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, paras 21-26. I agree with Lord Neuberger (also at para 17) that those cases show that the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. As Lord Hoffmann made clear in the first of the principles he summarised in the Investors Compensation Scheme case at page 912H, the relevant reasonable person is one 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.

The issue between the parties in this appeal is the role to be played by considerations of business common sense in determining what the parties meant. Sir Simon Tuckey said at para 19 of his judgment that there was no dispute about the principles of construction and the Bank so submitted in its skeleton argument. However, I do not think that is quite correct.

At para 18 Sir Simon identified the question of construction substantially as set out in para 9 above and said at para 19:

“There is no dispute about the principles of construction to be applied in order to answer this question. The court must first look at the words which the parties have used in the bond itself. The shipbuilding contract is of course the context and cause for the bond but is nevertheless a separate contract between different parties. If the language of the bond leads clearly to a conclusion that one or other of the constructions contended for is the correct one, the Court must give effect to it, however surprising or unreasonable the result might be. But if there are two possible constructions, the Court is entitled to reject the one which is unreasonable and, in a commercial context, the one which flouts business common sense. This follows from the House of Lords decisions in Wickman Machine Tools Sales Limited v Schuler AG [1974] AC 235, where at 251 Lord Reid said:

‘The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result, the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear.’

and The Antaios [1984] AC 191, where at 201 Lord Diplock said:

‘If detailed 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.'”

As I read his judgment, Patten LJ did not put the question in quite the same way. This can be seen from paras 35 to 44 of his judgment. At para 35 he referred to Sir Simon Tuckey’s approach at para 19 (as quoted above). He also referred to para 18(iii) of the Judge’s judgment, where the Judge described the Bank’s construction of the Bond as having the surprising and uncommercial result of the guarantee not being available to meet the Builder’s repayment obligations in the event of insolvency. Patten LJ noted that the Judge appeared to have taken that into account as a factor in favour of the Buyers’ construction of paragraph [3] of the Bonds. Patten LJ added that the Judge’s approach was the same as that of Sir Simon Tuckey.

Patten LJ then referred to the cases mentioned above and expressed his conclusion in principle thus at para 42:

“In this case (as in most others) the Court is not privy to the negotiations between the parties or to the commercial and other pressures which may have dictated the balance of interests which the contract strikes. Unless the most natural meaning of the words produces a result which is so extreme as to suggest that it was unintended, the Court has no alternative but to give effect it its terms. To do otherwise would be to risk imposing obligations on one or other party which they were never willing to assume and in circumstances which amount to no more than guesswork on the part of the Court.”

Finally, at paras 43 and 44, Patten LJ quoted from the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, 1384-5 and of Lord Hoffmann in Chartbrook at para 20, where they discussed the reason for the rule excluding evidence of pre-contractual negotiations. In particular they stressed the irrelevance of the parties’ subjective intentions and noted that the mere fact that a term in the contract appears to be particularly unfavourable to one party or the other is irrelevant. As Lord Hoffmann put it, the term may have been agreed in exchange for some concession made elsewhere in the transaction or it may simply have been a bad bargain.

I entirely accept those caveats. However, it seems to me to be clear that the principle stated by Patten LJ in para 42 is different from that stated by the Judge in his para 18(iii) and by Sir Simon Tuckey in para 19. It is not in my judgment necessary to conclude that, unless the most natural meaning of the words produces a result so extreme as to suggest that it was unintended, the court must give effect to that meaning.

The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one 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. 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.

This conclusion appears to me to be supported by Lord Reid’s approach in Wickman quoted by Sir Simon Tuckey and set out above. I am of course aware that, in considering statements of general principle in a particular case, the court must have regard to the fact that the precise formulation of the proposition may be affected by the facts of the case. Nevertheless, there is a consistent body of opinion, largely collated by the Buyers in an appendix to their case, which supports the approach of the Judge and Sir Simon Tuckey.

Where the parties have used unambiguous language, the court must apply it. This can be seen from the decision of the Court of Appeal in Co-operative Wholesale Society Ltd v. National Westminster Bank plc [1995] 1 EGLR 97. The court was considering the true construction of rent review clauses in a number of different cases. The underlying result which the landlords sought in each case was the same. The court regarded it as a most improbable commercial result. Where the result, though improbable, flowed from the unambiguous language of the clause, the landlords succeeded, whereas where it did not, they failed. The court held that ordinary principles of construction applied to rent review clauses and applied the principles in The Antaios (Antaios Compania Naviera SA v Salen Rederierna AB) [1985] AC 191. After quoting the passage from the speech of Lord Diplock cited above, Hoffmann LJ said, at p 98:

“This robust declaration does not, however, mean that one can rewrite the language which the parties have used in order to make the contract conform to business common sense. But language is a very flexible instrument and, if it is capable of more than one construction, one chooses that which seems most likely to give effect to the commercial purpose of the agreement.”

The court also comprised Leggatt and Simon Brown LJJ. Simon Brown LJ at p 101 said that, having regard to the improbable result for which the landlords contended, only the most unambiguous of such clauses could properly be found to bear the landlords construction and that in the case of only one of the leases did the clause “unambiguously …achieve the improbable result for which the landlords contend”. The case is of interest because Simon Brown LJ considered that, of the other three cases, one unambiguously failed to achieve the result sought by the landlords, whereas, of the other two, he said this at p 102:

“For my part, I would accept that the more obvious reading of both favours the landlord’s construction. I am persuaded, however, that they are capable of being, and therefore, for the reasons already given, should be, construed differently.”

That case is therefore an example of the adoption and application of the principle endorsed by the Judge and by Sir Simon Tuckey. See also International Fina Services AG v Katrina Shipping Ltd, The Fina Samco [1995] 2 Lloyd’s Rep. 344, where Neill LJ said at page 350 it was necessary when construing a commercial document to strive to attribute to it a meaning which accords with business common sense.

In 1997, writing extra-judicially (“Contract Law: Fulfilling the reasonable expectations of honest men”) in 113 LQR 433, 441 Lord Steyn expressed the principle thus:

“Often there is no obvious or ordinary meaning of the language under consideration. There are competing interpretations to be considered. In choosing between alternatives a court should primarily be guided by the contextual scene in which the stipulation in question appears. And speaking generally commercially minded judges would regard the commercial purpose of the contract as more important than niceties of language. And, in the event of doubt, the working assumption will be that a fair construction best matches the reasonable expectations of the parties.”

I agree. He said much the same judicially in Society of Lloyd’s v Robinson [1999] 1 All ER (Comm) 545, 551:

“Loyalty to the text of a commercial contract, instrument, or document read in its contextual setting is the paramount principle of interpretation. But in the process of interpreting the meaning of the language of a commercial document the court ought generally to favour a commercially sensible construction. The reason for this approach is that a commercial construction is likely to give effect to the intention of the parties. Words ought therefore to be interpreted in the way in which a reasonable commercial person would construe them. And the reasonable commercial person can safely be assumed to be unimpressed with technical interpretations and undue emphasis on niceties of language”.

Similar assistance is at hand nearer at home. In Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd [2001] CLC 1103, 1118-1119; [2011] EWCA Civ 1047; [2001] 2 All ER (Comm) 299, Mance LJ said:

“13. Construction, as Sir Thomas Bingham MR said in Arbuthnott v Fagan [1995] CLC 1396 at p 1400 is thus ‘a composite exercise, neither uncompromisingly literal nor unswervingly purposive’. To para (5), one may add as a coda words of Lord Bridge in Mitsui Construction Co Ltd v A-G of Hong Kong (1986) 33 BLR 14, cited in my judgment in Sinochem International Oil (London) Ltd v Mobil Sales and Supply Corp [2000] CLC 878 at p 885. Speaking of a poorly drafted and ambiguous contract, Lord Bridge said that poor drafting itself provides:

‘no reason to depart from the fundamental rule of construction of contractual documents that the intention of the parties must be ascertained from the language that they have used interpreted in the light of the relevant factual situation in which the contract was made. But the poorer the quality of the drafting, the less willing the court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention, if the language used, whatever it may lack in precision, is reasonably capable of an interpretation which attributes to the parties an intention to make provision for contingencies inherent in the work contracted for on a sensible and businesslike basis.’

…

16 … in my judgment the subclause has no very natural meaning and is, at the least, open to two possible meanings or interpretations – one the judge’s, the other that it addresses two separate subject-matters. In these circumstances, it is especially important to undertake the exercise on which the judge declined to embark, that is to consider the implications of each interpretation. In my opinion, a court when construing any document should always have an eye to the consequences of a particular construction, even if they often only serve as a check on an obvious meaning or a restraint upon adoption of a conceivable but unbusinesslike meaning. In intermediate situations, as Professor Guest wisely observes in Chitty on Contracts (28th edn) vol 1, para. 12-049, a ‘balance has to be struck’ through the exercise of sound judicial discretion.”

More generally, in Homburg Houtimport BV v Agrosin Private Ltd: The Starsin [2004] 1 AC 715, para 10 Lord Bingham referred to

“the rule to which Lord Halsbury LC alluded in Glynn v Margetson & Co [1893] AC 351, 359, ‘that a business sense will be given to business documents. The business sense is that which businessmen, in the course of their ordinary dealings, would give the document.”

Three other cases merit brief reference. The same approach was adopted by Arden LJ in In the Matter of Golden Key Ltd (In Receivership) [2009] EWCA Civ 636, paras 29 and 42 and by this Court in In Re Sigma Finance Corporation (in administrative receivership) [2009] UKSC 2; [2010] 1 All ER 571, where Lord Mance said at para 12 that the resolution of an issue of interpretation in a case like the present was an iterative process, involving checking each of the rival meanings against other provisions of the document and investigating its commercial consequences.

Finally, it is worth setting out two extracts from the judgment of Longmore LJ in Barclays Bank plc v HHY Luxembourg SARL [2010] EWCA Civ 1248; [2011] 1 BCLC 336, paras 25 and 26:

“25. The matter does not of course rest there because when alternative constructions are available one has to consider which is the more commercially sensible. On this aspect of the matter Mr Zacaroli has all the cards. …

26. The judge said that it did not flout common sense to say that the clause provided for a very limited level of release, but that, with respect, is not quite the way to look at the matter. If a clause is capable of two meanings, as on any view this clause is, it is quite possible that neither meaning will flout common sense. In such circumstances, it is much more appropriate to adopt the more, rather than the less, commercial construction.”

In my opinion Longmore LJ has there neatly summarised the correct approach to the problem. That approach is now supported by a significant body of authority. As stated in a little more detail in para 21 above, it is in essence that, where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense. For these reasons I prefer the approach of the Judge and Sir Simon Tuckey to that of Patten LJ, which is to my mind significantly different on this point.

Application to the facts

As indicated above, two possible interpretations of paragraph [3] of the Bonds were advanced. It was conc

“ 15. It clearly requires a strong case to persuade the court that something must have gone wrong with the language and the judge and the majority of the Court of Appeal did not think that such a case had been made out. On the other hand, Lawrence Collins LJ thought it had. It is, I am afraid, not unusual that an interpretation which does not strike one person as sufficiently irrational to justify a conclusion that there has been a linguistic mistake will seem commercially absurd to another: compare the Kirin-Amgen case [2005] RPC 169 at pp. 189-190. Such a division of opinion occurred in the Investors Compensation Scheme case itself. The subtleties of language are such that no judicial guidelines or statements of principle can prevent it from sometimes happening. It is fortunately rare because most draftsmen of formal documents think about what they are saying and use language with care. But this appears to be an exceptional case in which the drafting was careless and no one noticed.

16. I agree with the dissenting opinion of Lawrence Collins LJ because I think that to interpret the definition of ARP in accordance with ordinary rules of syntax makes no commercial sense.

27. If your Lordships agree with this conclusion about the construction of the contract, the appeal must be allowed. There is no need to say anything more. But Persimmon advanced two alternative arguments of very considerable general importance and I think it is appropriate that your Lordships should deal with them. The first was that (contrary to the unanimous opinion of the judge and the Court of Appeal) the House should take into account the pre-contractual negotiations, which in the opinion of Lawrence Collins LJ (at paragraph 132), were determinative confirmation of Persimmon’s argument on construction. The second was that the judge and the Court of Appeal had misunderstood the principles upon which rectification may be decreed and that if Persimmon had failed on construction, the agreement should have been rectified.

28. The rule that pre-contractual negotiations are inadmissible was clearly reaffirmed by this House in Prenn v Simmonds [1971] 1 WLR 1381…

30. To allow evidence of pre-contractual negotiations to be used in aid of construction would therefore require the House to depart from a long and consistent line of authority, the binding force of which has frequently been acknowledged: see Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657, 665 (“well-established and salutary”, per Lord President Rodger; Alexiou v Campbell [2007] UKPC 11 (“vouched by…compelling authorities”, per Lord Bingham of Cornhill.) The House is nevertheless invited to do so, on the ground that the rule is illogical and prevents a court from, as the Lord Justice Clerk in Inglis v John Buttery & Co (1878) 3 App Cas 552 said, putting itself in the position of the parties and ascertaining their true intent.

31. In Prenn v Simmonds [1971] 1 WLR 1381, 1384 Lord Wilberforce said by way of justification of the rule:

32. Critics of the rule, such as Thomas J in New Zealand (Yoshimoto v Canterbury Golf International Ltd [2001] 1 NZLR 523, 538-549) Professor David McLauchlan (“Contract Interpretation: What is it About?” (2009) 31:5 Sydney Law Review 5-51) and Lord Nicholls of Birkenhead (“My Kingdom for a Horse: The Meaning of Words” (2005) 121 LQR 577-591) point out that although all this may usually be true, in some cases it will not. Among the dirt of aspirations, proposals and counter-proposals there may gleam the gold of a genuine consensus on some aspect of the transaction expressed in terms which would influence an objective observer in construing the language used by the parties in their final agreement. Why should court deny itself the assistance of this material in deciding what the parties must be taken to have meant? Mr Christopher Nugee QC, who appeared for Persimmon, went so far as to say that in saying that such evidence was unhelpful, Lord Wilberforce was not only providing a justification for the rule but delimiting its extent. It should apply only in cases in which the pre-contractual negotiations are actually irrelevant. If they do assist a court in deciding what an objective observer would have construed the contract to mean, they should be admitted. I cannot accept this submission. It is clear from what Lord Wilberforce said and the authorities upon which he relied that the exclusionary rule is not qualified in this way. There is no need for a special rule to exclude irrelevant evidence.

33. I do however accept that it would not be inconsistent with the English objective theory of contractual interpretation to admit evidence of previous communications between the parties as part of the background which may throw light upon what they meant by the language they used. The general rule, as I said in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, 269, is that there are no conceptual limits to what can properly be regarded as background. Prima facie, therefore, the negotiations are potentially relevant background. They may be inadmissible simply because they are irrelevant to the question which the court has to decide, namely, what the parties would reasonably be taken to have meant by the language which they finally adopted to express their agreement. For the reasons given by Lord Wilberforce, that will usually be the case. But not always. In exceptional cases, as Lord Nicholls has forcibly argued, a rule that prior negotiations are always inadmissible will prevent the court from giving effect to what a reasonable man in the position of the parties would have taken them to have meant. Of course judges may disagree over whether in a particular case such evidence is helpful or not. In Yoshimoto v Canterbury Golf International Ltd [2001] 1 NZLR 523. Thomas J thought he had found gold in the negotiations but the Privy Council said it was only dirt. As I have said, there is nothing unusual or surprising about such differences of opinion. In principle, however, I would accept that previous negotiations may be relevant.

34. It therefore follows that while it is true that, as Lord Wilberforce said, inadmissibility is normally based in irrelevance, there will be cases in which it can be justified only on pragmatic grounds. I must consider these grounds, which have been explored in detail in the literature and on the whole rejected by academic writers but supported by some practitioners.

35. The first is that the admission of pre-contractual negotiations would create greater uncertainty of outcome in disputes over interpretation and add to the cost of advice, litigation or arbitration. Everyone engaged in the exercise would have to read the correspondence and statements would have to be taken from those who took part in oral negotiations. Not only would this be time-consuming and expensive but the scope for disagreement over whether the material affected the construction of the agreement (as in the Yoshimoto case) would be considerably increased. As against this, it is said that when a dispute over construction is litigated, evidence of the pre-contractual negotiations is almost invariably tendered in support of an alternative claim for rectification (as in Prenn v Simmonds and in this case) or an argument based on estoppel by convention or some alleged exception to the exclusionary rule. Even if such an alternative claim does not succeed, the judge will have read and possibly been influenced by the evidence. The rule therefore achieves little in saving costs and its abolition would restore some intellectual honesty to the judicial approach to interpretation.

36. There is certainly a view in the profession that the less one has to resort to any form of background in aid of interpretation, the better. The document should so far as possible speak for itself. As Popham CJ said in the Countess of Rutland’s Case (1604) 5 Co Rep 25, 25b, 26a:

38. I rather doubt whether the ICS case produced a dramatic increase in the amount of material produced by way of background for the purposes of contractual interpretation. But pre-contractual negotiations seem to me capable of raising practical questions different from those created by other forms of background. Whereas the surrounding circumstances are, by definition, objective facts, which will usually be uncontroversial, statements in the course of pre-contractual negotiations will be drenched in subjectivity and may, if oral, be very much in dispute. It is often not easy to distinguish between those statements which (if they were made at all) merely reflect the aspirations of one or other of the parties and those which embody at least a provisional consensus which may throw light on the meaning of the contract which was eventually concluded. But the imprecision of the line between negotiation and provisional agreement is the very reason why in every case of dispute over interpretation, one or other of the parties is likely to require a court or arbitrator to take the course of negotiations into account. Your Lordships’ experience in the analogous case of resort to statements in Hansard under the rule in Pepper v Hart [1993] AC 593 suggests that such evidence will be produced in any case in which there is the remotest chance that it may be accepted and that even these cases will be only the tip of a mountain of discarded but expensive investigation. Pepper v Hart has also encouraged ministers and others to make statements in the hope of influencing the construction which the courts will give to a statute and it is possible that negotiating parties will be encouraged to improve the bundle of correspondence with similar statements.

39. Supporters of the admissibility of pre-contractual negotiations draw attention to the fact that Continental legal systems seem to have little difficulty in taking them into account. Both the Unidroit Principles of International Commercial Contracts (1994 and 2004 revision) and the Principles of European Contract Law (1999) provide that in ascertaining the “common intention of the parties”, regard shall be had to prior negotiations: articles 4.3 and 5.102 respectively. The same is true of the United Nations Convention on Contracts for the International Sale of Goods (1980). But these instruments reflect the French philosophy of contractual interpretation, which is altogether different from that of English law. As Professor Catherine Valcke explains in an illuminating article (“On Comparing French and English Contract Law: Insights from Social Contract Theory”) (16 January 2009), French law regards the intentions of the parties as a pure question of subjective fact, their volonté psychologique, uninfluenced by any rules of law. It follows that any evidence of what they said or did, whether to each other or to third parties, may be relevant to establishing what their intentions actually were. There is in French law a sharp distinction between the ascertainment of their intentions and the application of legal rules which may, in the interests of fairness to other parties or otherwise, limit the extent to which those intentions are given effect. English law, on the other hand, mixes up the ascertainment of intention with the rules of law by depersonalising the contracting parties and asking, not what their intentions actually were, but what a reasonable outside observer would have taken them to be. One cannot in my opinion simply transpose rules based on one philosophy of contractual interpretation to another, or assume that the practical effect of admitting such evidence under the English system of civil procedure will be the same as that under a Continental system.

40. In his judgment in the present case, Briggs J thought that the most powerful argument against admitting evidence of pre-contractual negotiations was that it would be unfair to a third party who took an assignment of the contract or advanced money on its security. Such a person would not have been privy to the negotiations and may have taken the terms of the contract at face value. There is clearly strength in this argument, but it is fair to say that the same point can be made (and has been made, notably by Saville LJ in National Bank of Sharjah v Dellborg [1997] EWCA Civ 2070, which is unreported, but the relevant passage is cited in Lord Bingham’s paper in the Edinburgh Law Review) in respect of the admissibility of any form of background.

41. The conclusion I would reach is that there is no clearly established case for departing from the exclusionary rule. The rule may well mean, as Lord Nicholls has argued, that parties are sometimes held bound by a contract in terms which, upon a full investigation of the course of negotiations, a reasonable observer would not have taken them to have intended. But a system which sometimes allows this to happen may be justified in the more general interest of economy and predictability in obtaining advice and adjudicating disputes. It is, after all, usually possible to avoid surprises by carefully reading the documents before signing them and there are the safety nets of rectification and estoppel by convention. Your Lordships do not have the material on which to form a view. It is possible that empirical study (for example, by the Law Commission) may show that the alleged disadvantages of admissibility are not in practice very significant or that they are outweighed by the advantages of doing more precise justice in exceptional cases or falling into line with international conventions. But the determination of where the balance of advantage lies is not in my opinion suitable for judicial decision. Your Lordships are being asked to depart from a rule which has been in existence for many years and several times affirmed by the House. There is power to do so under the Practice Statement (Judicial Precedent) [1966] 1 WLR 1234. But that power was intended, as Lord Reid said in R v National Insurance Comrs, Ex p Hudson [1972] AC 944, 966, to be applied only in a small number of cases in which previous decisions of the House were “thought to be impeding the proper development of the law or to have led to results which were unjust or contrary to public policy”. I do not think that anyone can be confident that this is true of the exclusionary rule.

42. The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract meant. It does not exclude the use of such evidence for other purposes: for example, to establish that a fact which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it.

47. On its facts, the Karen Oltmann was in my opinion an illegitimate extension of the “private dictionary” principle which, taken to its logical conclusion, would destroy the exclusionary rule and any practical advantages which it may have. There are two legitimate safety devices which will in most cases prevent the exclusionary rule from causing injustice. But they have to be specifically pleaded and clearly established. One is rectification. The other is estoppel by convention, which has been developed since the decision in the Karen Oltmann: see Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982] QB 84. If the parties have negotiated an agreement upon some common assumption, which may include an assumption that certain words will bear a certain meaning, they may be estopped from contending that the words should be given a different meaning. Both of these remedies lie outside the exclusionary rule, since they start from the premise that, as a matter of construction, the agreement does not have the meaning for which the party seeking rectification or raising an estoppel contends.”

Baroness Hale

“ 99. But I have to confess that I would not have found it quite so easy to reach this conclusion had we not been made aware of the agreement which the parties had reached on this aspect of their bargain during the negotiations which led up to the formal contract. On any objective view, that made the matter crystal clear. This, to me, increased the attractions of accepting counsel’s eloquent invitation to reconsider the rule in Prenn v Simmonds [1971] 1 WLR 1381, the pot so gently but effectively stirred by Lord Nicholls of Birkenhead in his Chancery Bar Association lecture of 2005 ([2005] 121 LQR 577). My experience at the Law Commission has shown me how difficult it is to achieve flexible and nuanced reform to a rule of the common law by way of legislation. In the end abolition may be the only workable legislative solution, as eventually happened with the hearsay rule (Law Com No 216 (1993), BAILII: [1993] EWLC 216), The Hearsay Rule in Civil Proceedings). Even that can prove difficult if, on analysis, the view is taken that the rule has no real content, as with the parol evidence rule (Law Com No 154 (1986, BAILII: [1986] EWLC 154), The Parol Evidence Rule). The courts, on the other hand, are able to achieve step-by-step changes which can distinguish cases in which such evidence is “helpful” from cases in which it is not.

100. However, the approach to rectification adopted by Lord Hoffmann would go a long way towards providing a solution. If the test of the parties’ continuing common intentions is an objective one, then the court is looking to see whether there was such a prior consensus and if so what it was. Negotiations where there was no such consensus are indeed “unhelpful”. But negotiations where consensus was reached are very helpful indeed. If the language in the eventual contract does not reflect that consensus, then unless there has been a later variation of it, the formal contract should be rectified to reflect it. It makes little sense if the test for construing their prior consensus is different from the objective test for construing their eventual contract. This situation is, and should be, quite different from the situation where one party is mistaken as to its meaning and the other party knows this – the latter should not be permitted to take advantage of the former.

Oceanbulk Shipping & Trading SA v TMT Asia Ltd & Ors

[2010] UKSC 44 [2011] 1 AC 662, [2011] 1 All ER (Comm) 1, [2010] UKSC 44, [2010] 4 All ER 1011, [2011] 1 Lloyd’s Rep 96, [2010] 3 WLR 1424

Lord Clark

Should the interpretation exception be recognised as an exception to the without prejudice rule?

I have reached the conclusion that this question should be answered in the affirmative for these reasons. The principles which govern the correct approach to the interpretation of contracts have been the subject of some development, or at least clarification, in recent years as a result of a number of important decisions of the House of Lords. The position was clearly stated by Lord Steyn in R (Westminster City Council) v National Asylum Support Service [2002] UKHL 38, [2002] 1 WLR 2956. He summarised the position thus in para 5:

“The starting point is that language in all legal texts conveys meaning according to the circumstances in which it was used. It follows that the context must always be identified and considered before the process of construction or during it. It is therefore wrong to say that the court may only resort to evidence of the contextual scene when an ambiguity has arisen. In regard to contractual interpretation this was made clear by Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, 1384-1386, and in Reardon Smith Line Ltd v Yngvar Hansen-Tangen … [1976] 1 WLR 989, 995-996. Moreover, in his important judgment in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912-913, Lord Hoffmann made crystal clear that an ambiguity need not be established before the surrounding circumstances may be taken into account.”

As Lord Hoffmann himself put it in para 14 of his speech in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] AC 1101, in every case in which the interpretation of the language used in the contract is in issue, the question is 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. In Chartbrook the House of Lords considered and rejected the submission that what at para 42 Lord Hoffmann called the exclusionary rule, which excludes evidence of what was said or done in the course of negotiating an agreement for the purpose of drawing inferences about what the contract means, should now be abolished. It accordingly remains part of English law. The exclusionary rule does not exclude such evidence for all purposes. Lord Hoffmann put it thus in para 42:

“It does not exclude the use of such evidence for other purposes: for example, to establish that a fact which may be relevant was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it.”

It is not in dispute that, where negotiations which culminate in an agreement are not without prejudice, the exclusionary rule applies to the correct approach to the construction of the agreement. Nor is it in dispute that in those circumstances evidence of the factual matrix is admissible as an aid to interpretation even where the evidence formed part of the negotiations. The distinction between objective facts and other statements made in the course of negotiations was clearly stated by Lord Hoffmann in para 38 of Chartbrook:

“Whereas the surrounding circumstances are, by definition, objective facts, which will usually be uncontroversial, statements in the course of pre-contractual negotiations will be drenched in subjectivity and may, if oral, be very much in dispute.”

Trial judges frequently have to distinguish between material which forms part of the pre-contractual negotiations which is part of the factual matrix and therefore admissible as an aid to interpretation and material which forms part of the pre-contractual negotiations but which is not part of the factual matrix and is not therefore admissible. This is often a straightforward task but sometimes it is not. In my opinion this problem is not relevant to the question whether, where the pre-contractual negotiations that form part of the factual matrix are without prejudice, evidence of those negotiations is admissible as an aid to construction of the settlement agreement. The two questions are, as I see it, entirely distinct.

In these circumstances, I see no reason why the ordinary principles governing the interpretation of a settlement agreement should be any different regardless of whether the negotiations which led to it were without prejudice. The language should be construed in the same way and the question posed by Lord Hoffmann should be the same, namely 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. That background knowledge may well include objective facts communicated by one party to the other in the course of the negotiations. As I see it, the process of interpretation should in principle be the same, whether the negotiations were without prejudice or not. In both cases the evidence is admitted in order to enable the court to make an objective assessment of the parties’ intentions.

The parties entering into such negotiations would surely expect the agreement to mean the same in both cases. I would not accept the submission that to hold that the process of interpretation should be the same in both cases would be to offend against the principle underlying the without prejudice rule. The underlying principle, whether based in public policy or contract, is to encourage parties to speak frankly and thus to promote settlement. As I see it, the application in both cases of the same principle, namely to admit evidence of objective facts, albeit based on what was said in the course of negotiations, is likely to engender settlement and not the reverse. I would accept the submission made on behalf of TMT that, if a party to negotiations knows that, in the event of a dispute about what a settlement contract means, objective facts which emerge during negotiations will be admitted in order to assist the court to interpret the agreement in accordance with the parties’ true intentions, settlement is likely to be encouraged not discouraged. Moreover this approach is the only way in which the modern principles of construction of contracts can properly be respected.

Any other approach would be to introduce an unprincipled distinction between this class of case and two others which have already been accepted as exceptions to the without prejudice rule. I have already expressed the view that the rectification exception is correctly accepted because no sensible line can be drawn between admitting without prejudice communications in order to resolve the issue whether they have resulted in a concluded compromise agreement, which was the first exception identified by Robert Walker LJ in Unilever, and admitting them in order to resolve the issue what that agreement was. There is also no sensible basis on which a line can be drawn between the rectification case and this type of case.

This can clearly be seen by a consideration of Sir Richard Buxton’s article at [2010] CLJ 253 entitled ‘”Construction’ and Rectification after Chartbrook”, where he compares the fifth principle identified by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society (“the ICS case”) and the principles of rectification. It is not necessary to set out in full the five principles which Lord Hoffmann set out in that case at [1998] 1 WLR 896, 912H-913E. However, his fourth and fifth principles were in these terms:

“(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. 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: see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749.

5) 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. On the other hand, if one would nevertheless 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.”

In his article Sir Richard Buxton expresses the view at p 256 that the fifth principle was revolutionary because it overrode the previous understanding that, rectification apart, the court could not depart from the words of a document to find an agreement different from that stated in the document. Whether that is so or not, Sir Richard is in my opinion correct when he notes that the principles enshrined in ICS, especially the fifth principle, point to the close relationship between interpretation and rectification. He notes at p 257 the essence of rectification as described in the judgment of Slade LJ (with whom Oliver and Robert Goff LJJ agreed) in Agip SpA v Navigazione Alta Italia SpA (“The Nai Genova”) [1984] 1 Lloyd’s Rep 353 at 359:

“In principle, the remedy of rectification is one permitted by the Court, not for the purpose of altering the terms of an agreement entered into between two or more parties, but for that of correcting a written instrument which, by a mistake in verbal expression, does not accurately reflect their true agreement.”

Sir Richard then says that a closer expression of the process necessarily envisaged by principle 5 of ICS could scarcely be found.

I am not sure that I would put it quite as high as Sir Richard does but I entirely agree with him that the problems with which both the principles of rectification and the principles of construction (as explained in recent cases) grapple are closely related. This is an important factor in leading to the conclusion that evidence of what was said or written in the course of without prejudice negotiations should in principle be admissible, both when the court is considering a plea of rectification based on an alleged common understanding during the negotiations and when the court is considering a submission that the factual matrix relevant to the true construction of a settlement agreement includes evidence of an objective fact communicated in the course of such negotiations.

For these reasons I would hold that the interpretation exception should be recognised as an exception to the without prejudice rule. I would do so because I am persuaded that, in the words of Lord Walker in Ofulue (at para 57), justice clearly demands it. In doing so I would however stress that I am not seeking either to underplay the importance of the without prejudice rule or to extend the exception beyond evidence which is admissible in order to explain the factual matrix or surrounding circumstances to the court whose responsibility it is to construe the agreement in accordance with the principles identified in ICS and Chartbrook. In particular nothing in this judgment is intended otherwise to encourage the admission of evidence of pre-contractual negotiations.

Conclusion

For these reasons, I would hold that evidence in support of representations iii) and iv) is in principle admissible as part of the factual matrix or surrounding circumstances on the true construction of the agreement. It is I think common ground that it follows that it is also in principle admissible on the issues of estoppel and remoteness. In short I have reached a different conclusion from the majority of the Court of Appeal but essentially the same conclusion as was reached by Andrew Smith J at first instance and by Ward LJ in the Court of Appeal. For the reasons I have given I would allow the appeal.

LORD PHILLIPS

I agree with the reasoning and the conclusion of Lord Clarke. The principle to be derived from this appeal can be shortly stated. When construing a contract between two parties, evidence of facts within their common knowledge is admissible where those facts have a bearing on the meaning that should be given to the words of the contract. This is so even where the knowledge of those facts is conveyed by one party to the other in the course of negotiations that are conducted “without prejudice”. This principle applies both in the case of a contract that results from the without prejudice negotiations and in the case of any other subsequent contract concluded between the same parties. Accordingly I would allow this appeal.

Igote Ltd. v. Badsey Ltd.

[2001] IESC 65; [2001] 4 IR 511 (

Murphy J. S.C.

It was pleaded on behalf of the plaintiff and contended in argument that the annual payment of £40,000 was a contractual commitment to pay that sum and the failure to do so amounted to an indebtedness by the defendant. On behalf of the defendant, it was argued that the sum of £40,000 referred to in clause 4.3 aforesaid was a commitment to pay that sum by way of dividend and accordingly to make the payment only if profits were available for that purpose. The trial judge (Butler J.) upheld the argument of the plaintiff in an ex tempore judgment delivered on the 12th July, 2000 and it is from the judgment and order made on foot thereof that the defendant appeals to this court.

The issue between the parties concerns the proper construction of the share subscription agreement. The purpose of construing a document entered into between two or more persons is to ascertain their common intention. What “intention” in that context means and how it is ascertained has been the subject matter of much judicial authority in respect of which no real controversy arises in the present case. Perhaps a convenient explanation of the word “intention” in this context was provided by Lord Shaw in Great Western Railway v. Bristol Corporation (1918) 87 L.J. Ch. 414 when he said at p. 424:-

” one hears much use made of the word ‘intention’, but courts of law when on the work of interpretation are not engaged upon the task or study of what parties intended to do, but of what the language which

they employed shows that they did: in other words, they are not constructing a contract on the lines of what may be thought to have been what the parties intended, but they are construing the words and expressions used by the parties themselves. What do these mean? That, when ascertained, is the meaning to be given effect to, the meaning of the contract by which the parties are bound. The suggestion of an intention of parties different from the meaning conveyed by the words employed is no part of interpretation, but is mere confusion.”

Lord Wright expressed the same view in not dissimilar terms in Inland Revenue Commissioners v. Raphael [1935] A.C. 96 when he said at p. 142:-

“It must be remembered at the outset that the court, while it seeks to give effect to the intention of the parties, must give effect to that intention as expressed, that is, it must ascertain the meaning of the words actually used. There is often an ambiguity in the use of the word ‘intention’ in cases of this character. The word is constantly used as meaning motive, purpose, desire, as a state of mind, and not as meaning intention as expressed.”

There are numerous maxims and rules which have evolved over the years which may provide assistance in what can be the difficult task in ascertaining the intention of the parties. The plaintiff placed particular reliance on one such rule. It may be described as “the factual matrix rule”. That rule is frequently identified with Lord Wilberforce and the speeches made by him in Prenn v. Simmonds [1971] 1 W.L.R. 1381 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989. In Prenn v. Simmonds Lord Wilberforce said at p. 1383:-

“The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations We must inquire beyond the language and see what the circumstances were with reference to which the words were used, and the object appearing from those circumstances, which the person using them had in view.”

Lord Wilberforce then continued at p. 1385 in terms to the later part of which particular attention was directed by counsel on behalf of the plaintiff, namely:-

“In my opinion, then, evidence of negotiations, or of the parties intentions, and, a fortiori, of Dr. Simmonds’ intentions, ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the ‘genesis’ and objectively the ‘aim’ of the transaction.”

In Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989, Lord Wilberforce repeated his views at p. 995 in these terms:-

“No contracts made are in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as ‘the surrounding circumstances’ but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes a knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.”

The dangers involved in exploring the background or surrounding circumstances to a document under construction and the limitations which must be placed upon the factual matrix rule were referred to in Plumb Brothers v. Dolmac (Agriculture) Ltd. (1984) 271 E.G. 373 by May L.J. when he said at p. 374:-

“There has grown up a tendency to speak about construing documents in or against what is described as the ‘factual matrix’ in which the contract or documents first saw the light of day. In truth that is only, I think, a modern way of saying what has always been a rule for a long time that, in construing a document, one must look at all of the circumstances surrounding the making of the contract at the time it was made. There is the danger, if one stresses reference to the ‘factual matrix’ that one may be influenced by what is in truth a finding of the subjective intention of the parties at the relevant time, instead of carrying out what I understand to be the correct exercise, namely, determining objectively the intent of the parties from the words of the documents themselves in the light of the circumstances surrounding the transaction. It is not permissible, I think, to take into account the finding of fact about what the parties intended the document to achieve when one is faced with the problem some five, ten or many years later of construing it. In deciding what the document did in fact achieve, all that one can look at are the general circumstances surrounding the making of the document and in which it was made, and deduce the intention of the parties from the actual words of the document itself. The contract between the parties is what they said in the relevant document. It is not for this or any court to make a contract for the parties different from the words that the documents actually use merely because it may be that the parties intended something different.”

In Rohan Construction Ltd. v. Insurance Corporation of Ireland [1988] I.L.R.M. 373 this court, in a judgment delivered by Griffin J., did apply the principles enunciated by Lord Wilberforce in Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989, but the warning note sounded by May L.J. must be equally applicable in this jurisdiction. At the end of the day the rule as to construction and the context in which it is to be achieved is most succinctly expressed in the judgment of Keane J. (as he then was) in Kramer v. Arnold [1997] 3 I.R. 43 at p. 55 when he said:-

“In this case, as in any case where the parties are in disagreement as to what a particular provision of a contract means, the task of the court is to decide what the intention of the parties was, having regard to the language used in the contract itself and the surrounding circumstances.”

The importance which was attached by the plaintiff to the factual element is apparent from

…..

In my view the complicated background to the share subscription agreement is at best of a very limited value in construing the concluded agreement. At worst it provides the temptation, foreseen by May L.J., of seeking to extract the subjective intention or motivation of one or other, or even both, of the parties from the history rather than construe it in the context of that history.

In his judgment Butler J., having quoted the passage from Kramer v. Arnold [1997] 3 I.R. 43 at p. 55 which I have already cited, went on to say as follows:-

“As to the surrounding circumstances, I heard evidence from Mr. Brian Mooney on behalf of the plaintiff and from Mr. Brendan Henehan, solicitor, Paul McGowan, David Kennedy, David Deasy, Mark Dobbin and John Burke on behalf of the defendant. I am satisfied from the evidence of Mr. Mooney that what was agreed between the parties was that there would be a fixed ‘royalty’ payment of £40,000 as there had been in the case of the former agreement with the Irish Sugar Company (as it then was). This is corroborated by two matters which preceded the execution of the agreement.”

The two matters to which the trial judge referred were, first, a change in terminology from the heads of agreement dated the 19th July, 1991, and the share subscription agreement and, secondly, what the judge described in the following terms:-

“In notes prepared by Mr. Heneghan which preceded the agreement and which were obtained on discovery, he refers at one stage to a ’40K fixed royalty’ and in another he uses the words ‘they will get 40K up front’ and again ‘then Barlo will catch up on the 40K before dividends get split’.”

In my view the judge erred in ascertaining the intentions of the parties from the evidence heard by him as well as the alterations aforesaid and documents prepared in the course of the negotiations. The intention of the parties may be gleaned only from the document ultimately concluded by them, albeit construing it in the light of surrounding circumstances but not ascertaining their intentions from such circumstances. Such a process would be justified only where one or other of the parties claimed rectification of the document executed by him: that is not the present case.

Reading and rereading the share subscription agreement as a whole and in particular art. 4.3 thereof and having regard to the surrounding circumstances insofar as they are material, I am satisfied that the obligation of the defendant under art. 4.3 was to distribute the sum of £40,000 by way of dividend and that the shareholders, the plaintiff and Baggrave Ltd. had acomparable obligation to ensure that such a dividend was paid if, but only if, such a dividend could be lawfully paid. The trial judge expressed the view that the ordinary and natural meaning of the word “distribute” as used in the paragraph in question was “pay”. I would respectfully disagree with that view. The shorter Oxford Dictionary gives the primary definition of “distribute” as “to deal out or bestow in proportions or shares amongst many; to allot or apportion as his share to each”.

Accordingly the use of the word “distribute” suggests the payment of a dividend rather than the discharge of a particular commercial indebtedness. In his submissions to this court, counsel on behalf of the plaintiff understandably directed attention to the fact that clause 4.3 expressly provides for the payment of the sum of £40,000 to”the first subscriber” and does not relate the payment to any shares at the time being held by that subscriber. On the other hand the provision that the second tranche of £40,000 is to be distributed to the second subscriber is subject to the same observation and in that case there is no basis for suggesting that the payment should be made otherwise than by way of a dividend. It was argued on behalf of the defendant that the phrase “any dividends in excess of such amounts will be split ¦” indicates that the original “amounts”, like the excess, are all dividends. However it seems to me that the proper interpretation of the clause is put beyond doubt by the final sentence thereof which provides:-

“The first subscriber and the second subscriber will execute any dividend waiver necessary to implement the above, and will arrange where possible to pay such distributions by way of interim dividends as agreed.”

That sentence clearly recognises that the £40,000 to be paid to the plaintiff in priority to the claims of the second subscriber was a dividend which, prima facie, would be payable to all of the shareholders of the same class in proportion to their shareholdings and could be dealt with otherwise only by agreement between the parties. The final words of the sentence resolve any possible doubt by requiring arrangements to be made to make the annual payments, not by lump sums, but by “interim dividends”.

The only other clause of the share subscription agreement which throws any light on the matter is clause 5.8. That clause is headed”Dividends” and in the first sentence thereof provides:-

“Subject as hereinafter provided and to clause 4.3 the dividend policy of the company shall be determined by the Board from time to time.”

The expression confirms that clause 4.3 was in fact dealing with dividends and is at the very least consistent with the view that the sums of £40,000 payable to the plaintiff and second subscriber were indeed dividends, but payable in a manner which differed from the routine procedure and required – as provided – the express agreement or waiver of the shareholders concerned.

Unhappily, it would seem to me that the effort to place the agreement in the context in which it was made evolved into an impermissible investigation of the subjective intentions of the parties in entering into the agreement. I have no doubt that the agreement and in particular clause 4.3 thereof properly construed requires the defendant and the other parties thereto to procure the payment of the sums of £40,000 by way of dividend subject to the necessary qualification that such sums may only be paid when profits are available for that purpose.

In those circumstances I would allow the appeal, set aside the order of the High Court and substitute an order dismissing the plaintiff’s claim.

Holloway & Ors -v- Damianus BV & Ors

[2015] IECA 19

Court of Appeal

Composition of Court:

Kelly J., Hogan J., Mahon J.

20. Counsel for the trustees, Mr. McDonald SC, urged us to adopt the principle articulated in Forbes v. Git & Ors. [1922] 1 AC 256, where Lord Wrenbury stated (at page 259):

“….the principle of law to be applied may be stated in a few words. If in a deed an earlier clause is followed by a later clause which destroys altogether the obligation created by the earlier clause, the later clause is to be rejected as repugnant and the earlier clause prevails. In this case the two clauses cannot be reconciled and the earlier provision in the Deed prevails over the later. Thus if A covenants to pay £100 and the deed subsequently provides that he shall not be liable under his covenant, that latter provision is to be rejected as repugnant and void, for it altogether destroys the covenant. But if the later clause does not destroy but only qualifies the earlier, than the two are to be read together and effect is to be given to the intention of the parties as disclosed by the deed as a whole. Thus, if a covenant to pay £100 and the deed subsequently provides that he shall be liable to pay only at a future named date or in a future defined event or if at the due date of payment he holds a defined office, then the absolute covenant to pay is controlled by the words qualifying the obligation in the manner described.”

21. While there may well be cases where effect should be given to the earlier rather than the later provisions by reason of the sequence of such clauses in the contract, this Court is of the view that cases where this would be an important consideration are likely to be rare. Even in those types of unusual case, much may depend on the context (including, for example, the nature of the contract and whether it was a contract in standard form offered by one party to another) and the later inconsistent clause may sometimes be readily explained as an obvious error or oversight. Yet we would nonetheless be reluctant to adopt such a principle as a general rule, not least if it were to be applied in some quasi-mechanical or artificial fashion. Such an apparently dogmatic approach would be out of line with the modern attitude to the construction of contracts prescribed by the Supreme Court. This modern approach generally favours an holistic approach to the resolution of apparently conflicting contractual provisions, often by reference to well established doctrines such as the general “matrix of fact” principle, the parol evidence rule, the contra proferentem rule and the maxim of generalia specialibus non derogant; as adopted in a number of cases including Welch v. Bowmaker (Irl.) Ltd. [1980] I.R. 251, Analog Devices BV v. Zurich Insurance Co. [2005] 1 IR 274, ICDL GCCC Foundation v. European Computer Driving Licence Ltd. [2012] IESC 55.

22. Indeed, it may be observed that the English courts have shown no subsequent real enthusiasm for the principle articulated in Forbes v. Git. Thus, for example, in Peabody Trust Governors v. Reeves [2008] EWHC1432 (Ch) Gabriel Moss Q.C. (sitting as a Deputy High Court judge) certainly applied the principle so to give effect to the earlier two irreconcilable clauses. He nonetheless added, however, that:

“….this solution seems to me to be one of last resort only. It is not clear why the two sub-clauses in the present case come in the order in which they do. It may be that they could just as easily have appeared in the reverse order. That would have led to the opposite solution if this were the only applicable test. It is hardly satisfactory for the true agreement of the parties to be ascertained on grounds which may be arbitrary and I suspect it is only in rare cases that this approach will be applied.”

23. A similar view was taken in RSPCA v. Barry [2011] EWCA Civ 1474, [2011] 1 WLR 980 where Lord Neuberger M.R., said in the context of the construction of a will that:

“.…as a free standing point, the mere fact that one clause precedes another seems to me to be of minor potential relevance on the issue of how they inter-relate with each other.”

24. We consider that the more relevant principles of construction are instead to be found in the judgment of Henchy J. in Welch v Bowmaker (Irl.) Ltd. [1980] I.R. 251, a case where, as it happens, a later provision was preferred to an apparently conflicting earlier provision on the application of the principle generalia specialibus non derogant .

25. In that case a debenture was given by a company known as Central Garage (Cork) Ltd. to Bowmaker. Central Garage subsequently went into liquidation and the liquidator applied to the High Court pursuant to s. 280 of the Companies Act 1963 to determine which particular creditor should have priority in view of an apparent inconsistency in the provisions of the debenture itself.

26. Clause 3 of the debenture charged its property and assets, together with a charge over a particular premises specified in a schedule. While certain other properties belonging to the company were included in the schedule, a property known as Ivy Lawn was not. The particulars of the charge were then duly registered with the Registrar of Companies.

27. Approximately one month later Central Garage gave the Bank of Ireland an equitable mortgage over the property at Ivy Lawn by deposit of title deeds. As Henchy J. pointed out, if matters had stood at that point, there would have been no question of the Bank yielding priority to Bowmaker so far as the Ivy Lawn property was concerned. The complicating factor was that clause 1 of the debenture provided:

“This debenture is to rank as a second charge on the property within mentioned and such charge is to be as regards the company’s lands and premises for the time being and all its uncalled capital a specific charge and as regards all other the property and assets of the company a floating security but so that the company is not to be at liberty to create any mortgage or charge on its property for the time being in priority or pari passu with this debenture.”

28. Faced with this difficulty of interpretation, Henchy J. acknowledged (at P. 254):

“Read literally and on its own, this condition is in conflict with the charging provision [in clause 3]. The charging provision makes only the properties specified in the schedule subject to a specific charge: all else (including Ivy Lawn) is subject only to a floating charge. If the first condition is to be given prevailing force, it would make the company’s lands and premises for the time being (thus including Ivy Lawn) subject to a specific charge.”

29. In the High Court, Costello J. held that condition 1 operated to give Bowmaker a specific charge over the Ivy Lawn property, thus defeating the Bank’s claim to priority. This conclusion was, however, reversed by a majority of the Supreme Court with Henchy J. (254-255) applying the maxim generalia specialibus non derogant in order to hold that the general words of clause 1 should yield to the special provisions contained in clause 3:

“I consider that the primary and dominant words and expressions delineating the powers and the interests vested in Bowmaker by the debenture are to be found in the charging provision rather than in its attendant condition.

The relevant rule of interpretation is that encapsulated in the maxim generalia specialibus non derogant. In plain English, when you found a particular situation dealt with in special terms and later in the same document you find general words used which could be said to encompass and deal differently with that particular situation, the general words will not, in the absence of an indication of a definite intention to do so, be held to undermine or abrogate the special words which were used to deal with a particular situation. This is but a common sense way of giving effect to the true or primary intention or primary intention of the draughtsman, where the general words will usually have been used inadvertent of the fact that the particular situation has already been specially dealt with.”

30. Having set out the principle of interpretation, Henchy J. then proceeded to apply it to the facts of the case:

“In this debenture the charging provision limits the creation of a specific charge to the properties especially marked out with particularity in this schedule. If given its full literal meaning the subsequent condition, which provides that the charge created by the debenture is to be a specific charge “as regards to the company’s land and premises at the time being” would have such a generality of application as to make nonsense of the clear distinction that is drawn between the charging provisions between the properties marked out for a specific charge and the company’s other properties. In such a case, in order to effectuate the draftsman’s true intentions, it is the special rather than the general words that must prevail. Those special words show that the primary and transcendent intention was that the Ivy Lawn property, since it was not included in the schedule, was not to be subject to a specific charge. Therefore, I would hold that the debenture gave Bowmaker only a floating charge over it.

The words and the condition referring to “the company’s land and premises for the time being” should be construed as if they read “the company’s land and premises for the time being as specified in the schedule herein”. In that way the charging provision and the condition are brought into harmony.”

31. It is true that in the present case, as all the parties acknowledged, the relevant provisions of the trust deed cannot be easily aligned. Clause 19.1 provides that the scheme should be wound-up on the day when, inter alia, the employer ceased to carry on business or on the “giving or being deemed by the trustees to have given notice under clause 18.1 or clause 18.2 as applicable of its intention to discontinue contributions to the scheme.” If clause 19 were viewed in isolation, it would suggest that the obligation to make contributions ceased as of the date of the giving of notice by the trustees, namely, 1st October 2012.

32. Clause 18.1 in contrast expressly states that the obligation to discontinue payments contributions ceases with effect “from whichever of the following dates is applicable”, namely (a) the cesser of business by the employer or (b) the date specified in notice or agreed with the trustees. It is beyond question but that this latter provision was the one which was actually invoked by the employer, and agreed with the trustees, with a date of 31st December 2012 being agreed and fixed for this purpose.

33. It would make little practical sense to require the Defendants/Appellants (in their capacity as the Employer) to give three months written notice to the Plaintiffs/Respondents (in their capacity as the Trustees) of their intention to discontinue contributions to the scheme while at the same time providing (at Clause 19) that, in circumstances where such notice was given (as occurred in this case), the Scheme was to be deemed to have wound up on the first day of the giving of such notice. If Clause 19 was to create that result, it begs the question as to why a Scheme that was wound up should, (or indeed could), reasonably require three further months of contributions to be paid into it. It is likely therefore that the parties who drafted and executed the Trust Deed intended that a requirement, in particular circumstances, to provide three months notice in one of its Clauses would be rendered meaningless and inoperative by the immediately following numbered clause.

34. Yet, if the principles of interpretation articulated by Henchy J. in Welch are applied in the present case, it will be seen that in the context of the critical issue in this case – namely, the operative date on which the employer’s obligation to make contributions to the scheme is to cease – clause 18.1 of the trust deed must be regarded as a special clause in this sense. It is this provision which directly addresses the question of the notice period required in the case of the discontinuation of the employer’s contribution to the scheme. By contrast, clause 19.1 is in this context a general clause dealing with the winding-up of the scheme rather than with the more specific question of when the employer’s obligation to make contributions actually ceased.

35. It can therefore be observed, applying the expressive language of Henchy J. in Welch, that the “primary and dominant words and expressions” delineating the date on which the obligation to make contributions ceased are to be found in clause 18(1) rather than in what are in this context the more general words of clause 19(1).

36. Applying, therefore, the principle of generalia specialibus non derogant we consider that in the face of this apparent inconsistency, the words of clause 18(1) must be taken to prevail.

37. In relation to the Defendants/Appellants second ground of appeal, namely that any inability on their part to fund a shortfall in the Scheme’s fund was limited to the Minimal Funding Standard (MFS), and that as of 1st October 2012, or a later date in December 2012, the level of the fund satisfied this threshold, this court is satisfied that the threshold determining the Defendants/Appellants obligation is not so limited.

38. The threshold is as provided for in Clause 8.1. of the Trust Deed, that is a level of funding “necessary to support the Fund in order to provide the benefits under the Scheme”. The shortfall required to fund the Scheme sufficiently to meet that liability is €2,250,000.00, the amount claimed in these proceedings.

39. Accordingly, the Defendants/Appellants appeal is dismissed.

Hayes -v- Kelleher & ors

[2015] IEHC 509

Barrett J.

2. The court has been furnishedby the parties with a large number of authorities concerning various principles of contractual interpretation that are ostensibly applicable to the within proceedings. These cases are considered in greater detail in this Appendix, which forms part of the court’s judgment. A summary set of principles that the court considers can be derived from the cases detailed in this Appendix B is outlinedin Appendix C.

Section B. Cases to which reference has been made by the parties.

a. Irish authorities

i. Welsh v. Bowmaker Ltd [1980] I.R. 25

63. This was a case concerned with the proper interpretation of the terms of a debenture. It is of interest in the context of the within proceedings because of the following observations of Henchy and Parke JJ.,

64. Per Henchy J., at p. 254-255 of his judgment:

“I consider that the primary and dominant words and expressions delineating the extent of the powers and interests vested in Bowmaker by the debenture are to be found in the charging provision rather than its attendant condition.

The relevant rule of interpretation is that encapsulated in the maxim generaliaspecialibus non derogant[‘the general does not detract from the specific’]. In plain English, when you find a particular situation dealt with in special terms, and later in the same document you find general words used which could be said to encompass and deal differently with that particular situation, the general words will not in the absence of an indication of a definite intention to do so, be held to undermine or abrogate the effect of the special words which were used to deal with the particular situation. This is but a commonsense way of giving effect to the true or primary intention of the draftsman, for the general words will usually have been used in inadvertence of the fact that the particular situation has already been specially dealt with.”

65. Per Parke J., at p.261 of his judgment:

“In construing a document, a court is not entitled to speculate as to what the parties intended to say; the court’s task is to ascertain what is the true meaning and intention of the words used by the draftsman. If the words are free from inconsistency or ambiguity, it is not permissible to look outside the document itself or to attempt to ascribe any forced or strained meaning for such words in order to justify a particular construction. If (as in the present case) there is inconsistency between certain provisions of the document, it is necessary to consider the entire document and the facts and circumstances surrounding its execution in order to ascertain which of the conflicting expressions must take precedence in determining the true meaning of the document.

Over the years many useful maxims have been propounded by the Courts to assist in this process but the task always remains the same whether an apt maxim can or cannot be found in any particular case. How are the inconsistencies to be overcome so that the true and dominant intention of the parties can be realised? …When a provision of such particularity is subsequently followed by a general provision which is not only inconsistent with it but is, in itself, of an unusual and unsatisfactory form, then such general provision must not be allowed either to diminish or to extend the effect of the preceding clause.

Although the maxim generaliaspecialibus non derogant is usually applied to the construction of statutes in order to prevent an unintentional repeal of a specific provision in a prior section by a subsequent section using general words, I respectfully agree with Mr Justice Henchy in the judgment which he has just delivered that it is of very considerable assistance in the construction of documents inter partes and is particularly apt to the present case.”

ii. Grehan v. The North Eastern Health Board [1989] I.R. 422

66. This was a case concerned with a purported variation of a contract of employment following agreement of revised terms with a union of which the plaintiff was not member but whose previous standard terms of employment, as agreed between the State and the union, had formed part of the plaintiff’s contract of employment. The case is of interest in the within proceedings insofar as Costello J., largely by reference to Halsbury’s Laws of England, makes comment concerning when terms may be implied into a contract, e.g. to give it business efficacy (such as the total cap on director-numbers which it has been suggested that the court, in the within proceedings, should read into cl.2.2(a) of the shareholder agreement). Per Costello J., at pp.425-426 of his judgment:

“…I think I should briefly state the legal principles on the implication of terms. The legal principles applicable are not really in controversy. The debate, as so often happens, lies in their application to the facts of the case. In business transactions (and the contract between plaintiff and the board can, for present purposes, be so regarded):-

‘A term can only be implied if it is necessary in the business sense to give efficacy to the contract; that is, if it is such a term that that it can confidently be said that if at the time the contract was being negotiated some one had said to the parties ‘What will happen in such a case?’, they would both have replied ‘Of course, so and so will happen; we did not trouble to say that; it is too clear’.’

And furthermore:

‘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; and, 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 to say that it would be reasonable to make a particular implication; nor that it would make the carrying out of 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; nor will a term be implied where a contract is effective without the proposed term.

Whether a term will be implied is a question of law for the court. A term will not be implied so as to contradict any express term; and, in fact, a term ought not be implied unless on considering the whole matter in a reasonable manner 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. 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.’”(seeHalsbury’s Laws of England, 4th ed., vil. 9 (1974), paras. 355 and 356).

iii. Carroll v. An Post National Lottery Company [1996] 1 IR 443

67. Carroll was a dispute arising from the fact that a National Lottery agent’s representative had mis-fed lottery slips into a computer terminal, with the result that, per Mr Carroll, he did not get a ticket containing what later proved to be winning numbers. (In fact, it turned out in court that he had actually entered too many numbers on the purportedly winning slip). From a contract-law perspective, Carroll is of particular relevance as regards the enforceability of exemption clauses and the reading of terms (there statutorily informed terms) into a contract. It is in this last regard that the case has been cited in the within proceedings. Per Costello P., at p.459:

“The plaintiff pleaded that there is an express or, alternatively, an implied condition in his contract with the defendant company that the counterhand would use reasonable skill and care in entering his plays into the Lotto draw. Quite clearly there was no express term in that behalf in the parties’ contract. I am of the opinion that the court cannot imply such a term into the contract for two reasons. The Act of 1986 provides that the National Lottery is to be held in accordance with rules approved by the Minister for Finance….The court cannot properly imply into the parties’ contract a term which not only is not contained in the rules but which would be directly contrary to an express term in the rules as approved by the Minister. Secondly, the court will only imply a term in a contract if it is necessary to do so in order to give effect to the intention of the parties. In this case the defendant company quite clearly expressed the intention that it would not be liable for the negligence of its Lotto agents and so the court cannot imply a term which is contrary to the clear intention of one of the parties.”

iv. Igote Ltd v. Badsey Ltd [2001] 4 IR 511

68. This case concerned the proper interpretation of a share subscription agreement. On the issue of how to divine the intention of the parties to a contract, Murphy J. concluded at p.518, following a review of relevant case-law that:

“In my view the complicated background to the share subscription agreement is at best of a very limited value in construing the concluded agreement. At worst it provides the temptation, foreseen by May L.J. [in Plumb Brothers v. Dolmac (Agriculture) Ltd. (1984) 271 E.G. 373] of seeking to extract the subjective intention or motivation of one or other, or even both, of the parties from the history rather than construe it in the context of that history….

v. Analog Devices B.V. v. Zurich Insurance Company [2005] 1 IR 274

69. In Analog Devices, the plaintiffs sustained losses arising from the negligence of an employee. They claimed under their insurance policies in respect of the losses suffered. Their insurers, the defendants, sought to rely on certain exclusion clauses. The case turned on the interpretation to be given the relevant policies. Giving judgment for the Supreme Court, Geoghegan J. made the following remarks concerning the principles of contractual interpretation, at pp.280, et seq:

“In Rohan Construction v. I.C.I. [1988] I.L.R.M. 373 at p.377 Griffin J. in a judgment, with which Finlay C.J. and Hederman J. concurred, said the following:-

‘It is well settled that in construing the terms of a policy the cardinal rule is that the intention of the parties must prevail, but the intention is to be looked for on the face of the policy, including any documents incorporated therewith, in the words in which the parties have themselves chosen to express their meaning. The court must not speculate as to their intention, apart from their words, but may, if necessary, interpret the words by reference to the surrounding circumstances. The whole of the policy must be looked at, and not merely a particular clause.’

…Griffin J. goes on to expand on the meaning of ‘surrounding circumstances’ and he refers with approval to a passage from the speech of Lord Wilberforce in Reardon Smith Line Ltd. v. Hansen-Tangen [1976] 1 W.L.R. 989 at p.996:-

‘When one speaks of the intention of the parties to the contract, one is speaking objectively – the parties cannot themselves give direct evidence of what their intention was – and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly, when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have had in mind in the situation of the parties….What the court must do must be to place itself in thought in the same factual matrix as that in which the parties were.’

In modern times, these principles have received further expansion from the House of Lords. Lord Hoffman in I.C.S. v. West Bromwich B.S. [1998] 1 WLR 896 considered that quite a radical change had come about, the result of which ‘subject to one important exception’, was to assimilate the way in which documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. He then set out the modern principles at p.912 as he saw them and which I would accept…[These principles are identified in the court’s consideration of the I.C.S. case later below.]

…A fundamental principle which appears to be particularly relevant to this case is the principle of contra proferentem.Clark in Contract Law in Ireland (4th ed.) at p.149 sets out the general principle as follows:-

‘If the exempting provision is ambiguous and capable of more than one interpretation then the courts will read the clause against the party seeking to rely on it.’

The application of the principle to insurance contracts is treated in the same work at p.273. The author points out that two Irish cases provide clear guidance on the position to be adopted in the interpretation and construction of insurance contracts. The first passage is from Rohan Construction v. I.C.I. [1986] I.L.R.M. 419 from a High Court judgment of Keane J. The passage reads as follows:-

‘It is clear that policies of insurance, such as those under consideration in the present case, are to be construed like other written instruments. In the present case, the primary task of the court is to ascertain their meaning by adopting the ordinary rules of construction. It is also clear that, if there is any ambiguity in the language used, it is to be construed more strongly against the party who prepared it, i.e. in most cases against the insurer. It is also clear that the words used must not be construed with extreme literalism, but with reasonable latitude, keeping always in view the principal object of the contract of insurance.’

In Cheshire Fifoot and Furmston’sLaw of Contract (13th ed.) the rule is defined as meaning that if there is any doubt as to the meaning of the excluding or limiting term, the ambiguity should be resolved against the party who inserted it and seeks to rely on it.

The second Irish case referred to by Clark is In re Sweeney and Kennedy’s Arbitration [1950] I.R. 85 where Kingsmill Moore J. in his judgment in the High Court on a special case stated on a question of law arising from the award of an arbitrator said at pp.98 to 99 the following:-

‘But, even if I am wrong in my conclusion that the interpretation is reasonably free from doubt, the case must be decided against the underwriters if the words are ambiguous. The wording of the proposal must be deemed to have known, what matters were material to the risk and what information they desired to obtain. They were at liberty to adopt any phraseology which they desired….If then, they choose to adopt ambiguous words it seems to me good sense, as well as established law, that those words should be interpreted in the sense which is adverse to the persons who chose and introduced them….

I would like to associate myself with the opinion of Lord Greene M.R. in Woolfall&Rimmer Ltd. v. Moyle [1942] 1 K.B. 66 at p.73, where he says:- ‘…if underwriters wish to limit by some qualification a risk which, prima facie, they are undertaking in plain terms, they should make it perfectly clear what that qualification is. They should, with the aid of competent advice, make up their minds as to the qualifications they wish to impose and should express their intention in language appropriate for achieving the result desired. There is no justification for underwriters, who are carrying on a widespread business and making use of printed forms either failing to make up their minds what they mean, or, if they have made up their minds what they mean, failing to express it in suitable language. Any competent draughtsman could carry out the intention which [counsel] imputes to this document, and, if that was really intended, it ought to have been done’.’

Kingsmill Moore J. went on to observe that what Lord Greene had to say was ‘but the latest expression of a sentiment which judge after judge has uttered for nearly a century’ and he goes on to cite other passages which indicate that an insurance policy ought to be framed in such a way that it can clearly be understood. The principle of contra proferentem needs be resorted to, of course, only if there is an ambiguity.

…The second important general principle in relation to the exclusions is that the onus is on the insurer to establish the application of the exclusion or exemption. Counsel for the plaintiffs cite in their written submissions to this court a passage from the judgment of Hanna J. in General Omnibus Co. Ltd. v. London General Insurance Co. Ltd. [1936] I.R. 596 which is in the following terms, at p.598:-

‘The first defence depends upon the interpretation and construction of the exclusions or exceptions as stated in exemption (c). The policy starts by giving an indemnity in general terms and then imposing exceptions. The law is that the Insurance Company must bring this case clearly and unambiguously within the exception under which they claim benefit, and, if there is any ambiguity, it must be given against them on the principle contra proferentes.’

On appeal the Supreme Court took a different view on the interpretation of the policy but it was not suggested that the general principle stated by Hanna J. was incorrect. In the same written submissions there is a passage from the standard work Ivamy, General Principles of Insurance Law (6th ed.) which is worth quoting and it reads as follows, at p.286:-

‘Since exceptions are inserted in the policy mainly for the purpose of exempting the insurers from liability for a loss which, but for the exception, would be covered by the policy, they are construed against the insurers with the utmost strictness. It is the duty of the insurers to except their liability in clear and unambiguous terms.’”

70. Although Analog Devices was concerned with interpretation of insurance policies, the general principles identified appear to be of equal applicability in the within proceedings, though care is of course required when transplanting principles from the field of insurance law into the field of general contract law, given that it is a specialist area of the law with its own nuances and niceties and is infused to a large extent with the consequences of the duty of ‘uberrimaefidae’ (‘absolute good faith’) to which insurer and insured are each subject.

vi. Ahmed v. Health Service Executive [2007] 2 IR 106

71. This was a case involving a dispute as to the terms of a contract between a medical consultant and the HSE. It has been cited by Ms Hayes in the within proceedings as authority for the assertion that a term cannot be implied into a contract if this would contradict an express term. Per Laffoy J., at p.127 of her judgment: “[T]he proposition that an implied term must not contradict any express term of a contractcannot be gainsaid”.

vii. Emo Oil Ltd v. Sun Alliance & London Insurance plc [2009] IESC 2

72. This was a case concerned with the issue of when the insolvency of a company could be said to have occurred for the purposes of a particular insurance policy. When it comes to the principles of contractual interpretation, the case endorsed and followed Analog Devices. Even so, it is perhaps of interest because of Kearns J.’s rejection, at p.25 of his judgment, of a particular contention concerning the interpretation of an insurance policy on the basis that “[T]he interpretation contended for by the plaintiff would cause significant problems in practice and would flout business common sense”.

viii. ICDL v. European Computer Driving Foundation Ltd [2012] 3 I.R. 327

73. This was a case concerning the validity of the termination of a contract and the applicability of a limitation of damages clause. When it came to the principles applicable to the interpretation of a contract, Fennelly J., for the court, referred to the judgments of Geoghegan J. in Analog Devices, of Lord Hoffman in I.C.S. (considered later below) and to the above-quoted dictum of Lord Wilberforce in Reardon Smith Line, and then stated as follows, at pp.350 -353 of his judgment:

“[66] These various dicta are notable for their emphasis on the potential admissibility of background knowledge or what Lord Wilberforce famously described as the ‘matrix of fact’. Emphasis on those admissible aids to interpretation should not, however, mislead us into forgetting that a contract is, in the first instance, composed of the words used by the parties. It is of note that Geoghegan J. in his judgment in Analog Devices…cited…a passage from the judgment of Griffin J. in Rohan Construction [quoted in the extract from Geoghegan J.’s judgment above]….

[67] Geoghegan J. went on to note that Griffin J. had explained his reference to ‘surrounding circumstances’ and that he had cited the [above-quoted passage of Lord Wilberforce’s speech in Reardon Smith Line]….

[68] I join with O’Donnell J. in his approbation of the statement of Lord Hoffman in I.C.S. [considered later below]….

[69] [Having quoted the five principles in Lord Hoffman’s speech to which this Court makes reference below, Fennelly J. continues as follows.] This passage, particularly para.4, should not be misunderstood as advocating a loose and unpredictable path to interpretation. A court will always commence with an examination of the words used in the contract. Moreover words will, as Lord Hoffman emphasises, naturally be interpreted in accordance with their ‘natural and ordinary meaning…’. Business people will be assumed to know what they are doing and will normally be bound by what they have signed. The exercise is to be conducted objectively. The parties are not permitted to give evidence of their subjective intentions or of the negotiations leading to the conclusion of the contract….

[70] Evidence of the surrounding circumstances, but not of subjective intentions, may be admitted to explain the subject-matter and even what particular words used should be understood as referring to. Such evidence will not normally be allowed to alter the plain meaning of words….

[71] [T]he first plaintiff relies…on the contra proferentem rule. It is submitted that the agreement was prepared by and emanated from the defendant and that, if there is any ambiguity, in accordance with that rule, it must be construed against it, using the Latin maxim, ‘against the party proffering it’. It cites the judgment of McCarthy J. in Brady v. Irish National Insurance Co. Ltd. [1986] I.R. 698, at p.720.

[72] Brady…concerned the interpretation of a special warranty in a marine insurance policy. Finlay C.J., who delivered the majority judgment, with which Walsh, Hederman and McCarthy JJ. agreed, held at p.715 that the warranty should be interpreted in accordance with the ‘principle which would be applicable to the interpretation of a contract proffered by one person to another’. It was said to be ‘interpreted against the insurer…’. McCarthy J., at p.720, said that ‘a contract issuing from one party [to another] must be construed against him, if ambiguity there be’.

[73] As it happens, Analog Devices…is also an important authority on this point. Although the case concerned apolicy of insurance, Geoghegan J. referred at p.282 of his judgment to the general principle. He cited Clark on Contract Law in Ireland…for the proposition that:-

‘If the exempting provision is ambiguous and capable of more than one interpretation than the courts will read the clause against the party seeking to rely on it.’

….[75] The first plaintiff, in addition, submits that the party seeking to terminate an agreement, in accordance with its terms, must prove the existence of the facts which justify the alleged right to terminate….This is not the same as the contra proferentem rule, which concerns the meaning of terms. It means that there must be precise observance of any conditions or procedures governing termination of the agreement.”

ix. Dunnes Stores v. Holtglen Ltd [2012] IEHC 93

74. This was a case in which Dunnes Stores sought to set aside an arbitral award that arose out of a development dispute. The case is of interest in the context of a consideration of the principles of contractual interpretation because, after referring to Lord Hoffman’s statement of principles in the I.C.S. case as endorsed by the Supreme Court, inter alia, in Analog Devices, Kelly J. went on to observe as follows, at paras.49-52 of his judgment:

“49. In interpreting the commercial agreement, a court or arbitrator ought to endeavour to give it a commercially sensible construction. This is clear from the views expressed by Lord Steyn in Mannai Investments Limited v. Eagle Star Assurance Company Limited [1997] 3 All ER 352, where he said:-

‘In determining the meaning of the language of a commercial contract, and unilateral contractual notices, the law therefore generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. 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.’

50. Lord Steyn’s views having been approved of in this jurisdiction by Clarke J. in BNY Trust Company (Ireland) Limited v. Treasury Holdings [2007] IEHC 271.

51. The question of commercial commonsense has most recently attracted the attention of the United Kingdom Supreme Court in Rainy Sky S.A. v. Kookmin Bank [2011] 1 WLR 2900. The defendant bank sought to avoid payment on foot of advance payment bonds. It did so in circumstances where it claimed that the bonds true construction did not encompass the instalments in respect of which repayment was sought. Simon J. in the Commercial Court held that the construction contended for by the bank would give rise to a non-commercial result. His decision was reversed by a majority in the Court of Appeal. His order was restored by the Supreme Court. It held that where parties have used unambiguous language, irrespective of the question of commercial sense, the unambiguous language must be applied. If, however, there is an ambiguity then the court is entitled to construe the contract in the more commercially sensible manner.

52. Lord Clarke said:-

‘The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of the construction is essentially one 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. 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.’”

x. Marlan Homes Ltd v. Walsh [2012] IESC 23

75. This was a case that arose out of a dispute between the parties regarding the provision of mortgage facilities over certain lands and involved the construction of two agreements by reference to which the respective rights and obligations of the parties fell to be determined. It is of relevance in the within context because of certain observations of McKechnie J. that are considered by Laffoy J. in her judgment in Ickendel(considered below).

xi. Millar v. Financial Services Ombudsman [2014] IEHC 434

76. Millar is perhaps a slightly unusual case for the Defendants to invoke in that it has recently been reversed by the Court of Appeal. (See Financial Services Ombudsman v. Millar [2015] IECA 27). Even so, there seems no reason to consider that the trial judge (Hogan J.) erred when he opined in respect of the interpretation of words that are not a specialist term of art which has a defined meaning in legal or (as was applicable in that case) financial circles. Per Hogan J., at para. 22 of his judgment: “Given that these words are not terms of art, they must therefore be construed in the first instance by reference to the ordinary usage of these terms and how, objectively, these words would be understood by a reasonable person in the context in which they appear.”

xii. Ickendel Ltd v. Bewley’s Café Grafton Street Ltd [2014] IESC 41

77. Ickendel is very much a case of our times, or at least of very recent times, being concerned with the interpretation of a rent-review clause in a lease, pursuant to which rent due had been increased during a period of national economic collapse and related rent deflation. In her judgment for the court, Laffoy J., at paras. 9-10 of her judgment, stated the following as regards the principles of contractual interpretation:

“9. There is consensus that the relevant principles of law as to the proper approach to how a lease should be construed. The law can therefore be set out briefly. Meaning is to be gleaned from the plain words of an agreement; where there is no doubt as to the meaning of a clause, then it should be given that meaning; 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; where there is no ambiguity then it is unnecessary to consider the need to confer business efficacy on the agreement; but where the words used may reasonably bear more than one meaning then consideration as to how the agreement is to sensibly operate may allow one construction over another.

As authority for the foregoing propositions, the trial judge cited a number of authorities, for example, the decision of the Supreme Court in Analog Devices….

10. Counsel for the Landlord attached some significance to the fact that the trial judge also expressed agreement with, recognising that he was bound by, the decision of the Supreme Court in Marlan Homes Limited v. Walsh [2012] IESC 23. In fact, in his judgment the trial judge quoted, inter alia, paragraphs 48 to 52 of the judgment delivered by McKechnie J. in the Supreme Court in that case. In paragraphs 51 and 52, McKechnie J. stated as follows:

‘51. It is important, however, to note that where the parties have committed their responsibilities to written form, in a particular manner, it must be assumed that they have intended to give effect to their obligations in that way. Such must be recognised as their right, both commercially and under contract law. Accordingly, it is important that, when faced with a construction issue, a court should focus its mind on the language adopted by the parties being that which they have chosen to best reflect their intentions. It is not for the court, either by means of giving business or commercial efficacy or otherwise, to import into such 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.

52. The boundary between what is permissible and not in this context is captured by the following quotation from CharterReinsurance Co. Ltd. v. Fagan [1997] A.C. 313 where at p.388 Lord Mustill stated:-

‘There comes a point at which the court should remind itself that the task is to discover what the parties meant from what they have said, and that to force upon the words a meaning which they cannot fairly bear is to substitute for the bargain actually made one which the court believes could better have been made. This is an illegitimate role for a court. Particularly in the field of commerce, where the parties need to know what they must do and what they can insist on not doing, it is essential for them to be confident that they can rely on the court to enforce their contract according to its terms.’

I would respectfully agree with this passage.’”

78. Ickendel is perhaps most notable because it can be interpreted, rightly or wrongly, as suggesting that there has been a shift in the Supreme Court towards stricter adherence to the literal terms of agreement,and away from that ‘business common-sense’ to which reference has been made in various other of the cases referred to herein, including other decisions of the Supreme Court such as Emo Oil and Analog Devices (which saw a vicarious approval, via the approval by Geoghegan J. of Lord Hoffman’s judgment in I.C.S., of the long-ago judgment of Lord Diplock in The Antaios). This is because it canbe contended, again rightly or wrongly, that both common-sense and ‘business sense’ recoil from the notion that landlord or tenant ever contemplated, regardless of the strict terms of a lease, that the tenant would continue to be subject to rising rents in a period of national economic collapse that saw rental rates in the applicable market fall by about 50 per cent.

xiii. Holloway and Others v. Damianus B.V. and Others [2015] IECA 19

79. This was a case concerned with the interpretation of a pension and death benefits scheme. The Court of Appeal heard argument in support of adopting the principles contained in Forbes v. Git and Others [1922] 1 AC 256 to the effect that if, in a deed, an earlier clause is followed by a clause that obviates the obligation created by the earlier clause, the later clause must be rejected and the earlier must prevail; however, if the later clause merely qualifies, rather than obviating the earlier obligation, the two must be read together and effect given to the intention of the parties as disclosed by the deed as a whole. This somewhat contrived manner of interpretation did not meet with much success in the Court of Appeal which considered that cases where the sequencing of clauses in a contract would be dispositive of matters in the manner contemplated by the Privy Council in Forbes would be rare. Per the Court of Appeal (Kelly, Hogan and Mahon JJ.), at paras. 21 et seq:

“21. While there may well be cases where effect should be given to the earlier rather than the later provisions by reason of the sequence of such clauses in the contract, the Court is of the view that cases where this would be an important consideration are likely to be rare. Even in those types of unusual case, which may depend on the context (including, for example, the nature of the contract and whether it was a contract in standard form offered by one party to another) and the later inconsistent clause may sometimes be readily explained as an obvious error or oversight. Yet we would nonetheless be reluctant to adopt such a principle as a general rule, not least if it were to be applied in some quasi-mechanical or artificial fashion. Such an apparently dogmatic approach would be out of line with the modern attitude to the construction of contracts prescribed by the Supreme Court. The modern approach generally favours an holistic approach to the resolution of apparently conflicting contractual provisions, often by reference to well established doctrines such as the general ‘matrix of fact’ principle, the parol evidence rule, the contra proferentem rule and the maxim of generaliaspecialibus non derogant; as adopted in a number of cases including Welch…Analog Devices…and ICDL….

22. Indeed, it may be observed that the English courts have shown no subsequent real enthusiasm for the principle articulated in Forbes….

23. …[I]n RSPCA v. Barry [2011] EWCA Civ 1474…Lord Neuberger M.R., said in the context of the construction of a will that:

‘….as a free standing point, the mere fact that one clause precedes another seems to me to be of minor potential relevance on the issue of how they inter-relate with each other.’

24. We consider that the more relevant principles of construction are instead to be found in the judgment of Henchy J. in Welch v. Bowmaker…a case, where it happens, a later provision was preferred to an apparently conflicting earlier provision on the application of the principle generaliaspecialibus non derogant.”

Foreign authorities

xiv. Antaios Cia. Naviera SA v. SalenRederierna AB (‘TheAntaios’) [1985] A.C. 191

80. This was a case concerning whether there ought to have been leave to appeal granted in respect of an arbitrator’s award concerning the interpretation of a charterparty. It has been cited in the within proceedings because of Lord Diplock’s observation, at p.201 of his judgment that:

“While deprecating the extension of the expressive ‘purposive construction’ from the interpretation of statutes to the interpretation of private contracts…I take this opportunity of re-stating that if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.”

81. This passage met with the approval of Lord Hoffman in the I.C.S. case (considered immediately below), Lord Hoffman’s judgment in this regard later receiving the endorsement of Geoghegan J. in Analog Devices.

xv. Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 All E.R.98

82. This case, referred to generally in the within judgment as “I.C.S.”, concerned the interpretation of a contract whereby certain rights were assigned by claimant investors to the United Kingdom’s Investor Compensation Scheme. The principles of contractual interpretation espoused by Lord Hoffman in his speech in I.C.S. were endorsed by Geoghegan J. in his judgment in Analog Devices (considered above). Per Lord Hoffman at pp.114-115:

“I think I should preface my explanation of my reasons with some general remarks about the principles by which contractualdocuments are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law…is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded. The principles may be summarised as follows.

(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless 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. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v. SalenRederierna AB, The Antaios [1984] 3 All ER 229 at 233…

‘…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 be made to yield to business common sense.’”

xvi. Euro Brokers Holdings Ltd v. Monecor (London) Ltd [2003] 1 BCLC 506

83. Euro Brokers was a case concerned with the proper interpretation of a shareholder agreement. It is of interest in the context of the within proceedings because of the observation of Deputy Judge Leslie Kosmin QC, in the High Court, at p.527 of his judgment that:

“The shareholders’ agreement is of course a commercial document agreed between businessmen and designed to regulate their affairs….Like the articles the shareholders’ agreement must be the subject of constructive interpretation with a view to carrying out the intentions of the parties and enabling them to achieve their commercial purpose. In this context I would adopt towards the shareholders’ agreement the reasoning of Jenkins L.J. in Holmes v. Keyes [1958] 2 All ER 129 at 138…in relation to a company’s articles:

‘I think that the articles of association of the company should be regarded as a business document and should be construed so as to give them reasonable business efficacy, where a construction tending to that result is admissible on the language of the article, in preference to a result which would or might prove unworkable.’”

xvii. Matchbet Ltd v. Openbet Retail Ltd [2013] EWHC 3067

84. Matchbet can perhaps be viewed as something of an English corollary to the decision of the Supreme Court in Igote. In the last-mentioned case, it will be recalled that Murphy J., for the Supreme Court, held that the intention of the parties may be gleaned only from the document ultimately concluded by them (albeit construing it in the light of surrounding circumstances but not ascertaining their intentions from those circumstances).

85. Matchbetconcerned a claim for damages for alleged breaches of a software licensing and development agreement. It is of interest in the within proceedings because of the observation of Henderson J., at para.132 of his judgment, in respect of certain Heads of Terms, that “To the extent that the provisions of the Heads of Terms were not contractually binding, they were no more than steps in the pre-contractual negotiations between the parties and, as such, they are excluded by the exclusionary rule.”

xviii. Marley v. Rawlings [2014] UKSC 2

86. Marleywas a case involving a contested will where a husband and wife had executed wills at the same time but each had executed the other’s will in error. In the United Kingdom Supreme Court, Lord Neuberger indicated, at para.20 of his judgment, his view that the principles which underpin the interpretation of commercial contracts should also apply when it comes to interpreting wills. At para.19 of his judgment, he stated succinctly those principles of contractual interpretation as follows:

“When interpreting a contract, the court is concerned to find the intention of the party or parties, and it does this by identifying the meaning of the relevant words:

(a) in the light of:

(i) the natural and ordinary meaning of those words,

(ii) the overall purpose of the document,

(iii) any other provisions of the document

(iv) the facts known or assumed by the parties at the time that the document was

executed, and

(v) common sense, but

(b) ignoring subjective evidence of any party’s intentions.”

APPENDIX C

SOME PRINCIPLES OF CONTRACTUAL INTERPRETATION

87. The court summarises below the various principles of contractual interpretation that it considers the case-law reviewed in Appendix B to yield. The court has sought to apply various of the principles identified in this Appendix, when and as appropriate, throughout the main text of the judgment to which this Appendix is appended and of which it forms part.

A. Some general principles

(1). 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 maxim of generalia specialibus non derogant .[1]

(2). 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.[2]

(3). The exercise of construction is essentially one 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.[3]

B. Intention of parties

(4). The cardinal rule of construction is that the intention of the parties must prevail.[4]

(5). When one speaks of the intention of the parties to the contract, one is speaking objectively.[5]

(6). A court is not entitled to speculate as to what the parties intended to say.[6]

(7). The court must ascertain what is the true meaning and intention of the words used by the draftsman.[7]

(8). Intention is to be looked for on the face of the agreement, including any documents incorporated therewith, in the words in which the parties have themselves chosen to express their meaning.[8]

(9). Intention is discerned by identifying the meaning of the relevant words: in the light of: the natural and ordinary meaning of those words, the overall purpose of the document, any other provisions of the document, the facts known or assumed by the parties at the time that the document was executed, and common sense.[9]

(10). The law does not require judges to attribute to the parties an intention which they plainly could not have had.[10]

C. Subjective intent

(11). The law excludes from the admissible background declarations of subjective intent. They are admissible only in an action for rectification.[11]

(12). The parties cannot themselves give direct evidence of what their intention was.[12]

(13). What must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties.[13]

D. Previous Negotiations and Heads of Terms

(14). Non-contractually binding Heads of Terms are mere steps in the pre-contractual negotiations and, as such, excluded by the exclusionary rule.[14]

(15). The law excludes from the admissible background the previous negotiations of the parties.[15]

E. Focus on words of agreement

(16). Analog Devices, I.C.S. and Reardon Smith emphasise the potential admissibility of background knowledge. But a contract is, in the first instance, composed of the words used by the parties.[16]

(17). A court will always commence with an examination of the words used in the contract.[17]

(18). Where parties commit their responsibilities to written form, in a particular manner, it must be assumed that they intended to give effect to their obligations in that way. Such is their right, commercially and under contract law.[18]

(19). If words are free from inconsistency or ambiguity, it is not permissible to look outside the document itself or to attempt to ascribe any forced or strained meaning for such words in order to justify a particular construction.[19]

F. Words bear natural and ordinary meaning

(20). Words that are not terms of art will be construed in the first instance in accordance with their natural and ordinary meaning.[20]

(21). The ‘rule’ that words be given their natural and ordinary meaning reflects the common-sense proposition that we do not easily accept that people make linguistic mistakes, particularly in formal documents.[21]

(22). Meaning is to be gleaned from the plain words of an agreement.[22]

(23). Where there is no doubt as to the meaning of a clause, then it should be given that meaning.[23]

(24). The court’s task is to discover what the parties meant from what they have said. To force upon the words a meaning which they cannot fairly bear is to substitute for the bargain actually made one which the court believes better. This is an illegitimate role for a court. Particularly in the field of commerce, where the parties need to know what they must do and what they can insist on not doing, it is essential for them to be confident that they can rely on the court to enforce their contract according to its terms.[24]

(25). The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.[25]

(26). Where words reasonably bear more than one meaning then consideration as to how the agreement is to sensibly operate may allow one construction over another.[26]

G. Whole of document

(27). 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.[27]

(28). 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.[28]

H. Sequencing of clauses

(29). While there may be cases where effect should be given to the earlier rather than the later provisions by reason of the sequence of such clauses, cases where this would be an important consideration are likely to be rare.[29]

(30). Even in those rare cases, the later inconsistent clause may sometimes be readily explained as an obvious error or oversight.[30]

I. Matrix of fact

(31). 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.[31]

(32). 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.[32]

(33). 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.[33]

(34). 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.[34]

(35). What the court must do must be to place itself in thought in the same factual matrix as that in which the parties were.[35]

(36). 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.[36]

J. Common-sense and ‘business sense’

(37). Business people will be assumed to know what they are doing and will normally be bound by what they have signed.[37]

(38). 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.[38]

(39). 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.[39]

(40). The standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language.[40]

(41). 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.[41]

K. Generaliaspecialibus non derogant

(42). When you find a particular situation dealt with in special terms, and later in the same document you find general words used which could be said to encompass and deal differently with that particular situation, the general words will not in the absence of an indication of a definite intention to do so, be held to undermine or abrogate the effect of the special words which were used to deal with the particular situation.[42]

L. Contra proferentem

(43). If an exempting provision is ambiguous and capable of more than one interpretation, the courts will read the clause against the relying party.[43]

M. Shareholder Agreements and Articles of Association

(44). Like articles of association, a shareholder agreement must be the subject of constructive interpretation with a view to carrying out the intentions of the parties and enabling them to achieve their commercial purpose.[44]

(45). Articles of association should be regarded as a business document and construed to give them reasonable business efficacy, where a construction tending to that result is admissible on the language of the article, in preference to a result which would or might prove unworkable.[45]

N. Some points regarding insurance policies

(46). Policies of insurance are to be construed like other written instruments.[46] (This need not mean that other written instruments are to be construed like insurance policies).

(47). Words in an insurance policy must not be construed with extreme literalism, but with reasonable latitude, keeping always in view the principal object of the contract of insurance.[47]

(48). If insurance underwriters wish to limit by some qualification a risk which, prima facie, they are undertaking in plain terms, they should make it perfectly clear what that qualification is. There is no justification for underwriters, who are carrying on a widespread business and making use of printed forms either failing to make up their minds what they mean, or, if they have made up their minds what they mean, failing to express it in suitable language.[48]

O. Implied terms.

(49) In business transactions: (i) a term can only be implied if it is necessary in the business sense to give efficacy to the contract; (ii) whether a term will be implied is a question of law for the court; (iii) a term will not be implied where a contract is effective without the proposed term; (iv) a term ought not be implied unless it is clear that the parties must have intended that there should be the suggested stipulation; (v) the court has no discretion to create a new contract; (vi) 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; (vii) 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; (viii) 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; (ix) 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.[49]

(50) An implied term must not contradict any express term of a contract.[50]

(51) The court cannot imply a term that is contrary to statutory rules.[51]

(52) The court cannot imply a term that is contrary to the clear intention of one of the parties.[52]

P. Termination

(53). There must be precise observance of any conditions or procedures governing termination of the agreement.[53]

88. The following cases are relied upon by the court as precedents supporting the various principles of contractual interpretation that it considers the case-law reviewed in Appendix B to yield and which it has outlined immediately above: [1]see further Holloway and Others v. Damianus B.V. and Others [2005] IECA 19; [2]see further Analog Devices B.V. v. Zurich Insurance Company [2005] 1 IR 274, Investor Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896; [3]see further Analog Devices, Dunnes Stores v. Holtglen Ltd [2012] IEHC 93, I.C.S., Rainy Sky S.A. v.Kookmin Bank [2011] 1 WLR 2900; [4]see further Rohan Construction v. I.C.I. [1988] I.L.R.M. 373, Analog Devices; [5]see further Rohan, Analog Devices, ICDL v. European Computer Driving Foundation Ltd [2012] 3 I.R. 327, Reardon Smith Line Ltd. v. Hansen-Tangen[1976] 1 W.L.R. 989; [6]see further Welsh v. Bowmaker Ltd [1980] I.R. 25; [7]see further Welsh; [8]see further Rohan, Analog Devices, Igote Ltd v. Badsey Ltd [2001] 4 IR 511, Marlan Homes Ltd v. Walsh [2012] IESC 23, Ickendel Ltd v. Bewley’s Café Grafton Street Ltd [2014] IESC 41; [9]see further Marley v. Rawlings [2014] UKSC 2; [10]see further Analog Devices, Antaios Cia. Naviera SA v. Salen Rederierna AB (‘The Antaios’) [1985] A.C. 191, I.C.S.; [11]see furtherAnalog Devices, Igote, ICDL, I.C.S., Marley; [12]see further Rohan, Analog Devices, Reardon Smith, Marley; [13]see further Rohan, Analog Devices, Reardon Smith; [14]see furtherMatchbet Ltd v. Openbet Retail Ltd [2013] EWHC 3067; [15]see further Analog Devices, I.C.S.; [16]see furtherICDL; [17]see further ICDL; [18]see further rMarlanHomes, Ickendel; [19]see further Welsh; [20]see further ICDL, Millar v. Financial Services Ombudsman [2014] IEHC 434; [21]see furtherAnalog Devices, I.C.S.; [22]see furtherAnalog Devices, Ickendel; [23]see furtherAnalog Devices, Ickendel; [24]see furtherMarlan Homes, Ickendel, Charter Reinsurance Co. Ltd. v. Fagan [1997] A.C. 313; [25]see furtherAnalog Devices, I.C.S.; [26]see furtherAnalog Devices, Ickendel; [27]see furtherRohan, Analog Devices, Ickendel; [28]see furtherWelsh; [29]see furtherHolloway, RSPCA v. Barry [2011] EWCA Civ 1474; [30]see furtherHolloway; [31]see furtherRohan, Analog Devices; [32]see furtherAnalog Devices, The Antaios, I.C.S.; [33]see furtherAnalog Devices, I.C.S.; [34]see furtherAnalog Devices, I.C.S.; [35]see furtherRohan, Analog Devices, ReardonSmith; [36]see furtherICDL; [37]see furtherICDL; [38]see furtherAnalog Devices, BNY Trust Company (Ireland) Limited v. Treasury Holdings [2007] IEHC 271, Emo Oil, The Antaios, Mannai, I.C.S.; [39]see furtherAnalogDevices, Ickendel, Holtglen, Rainy Sky. [40]see furtherBNY Trust, Holtglen, Mannai Investments Limited v. Eagle Star Assurance Company Limited [1997] 3 All ER 352; [41]see furtherMarlan Homes; Ickendel; [42]see furtherWelsh, Holloway; [43]see furtherGeneral Omnibus Co. Ltd. v. London General Insurance Co. Ltd. [1936] I.R. 596, In re Sweeney and Kennedy’s Arbitration [1950] I.R. 85, Brady v. Irish National Insurance Co. Ltd.[1986] I.R. 698, Rohan (High Court, Keane J.); [44]see furtherEuro Brokers Holdings Ltd v. Monecor (London) Ltd [2003] 1 BCLC 506; [45]see furtherHolmes v. Keyes [1958] 2 All ER 129, Euro Brokers; [46]see furtherRohan (High Court, Keane J.), Analog Devices; [47]see furtherRohan (High Court, Keane J.), Analog Devices; [48]see furtherWoolfall&Rimmer Ltd. v. Moyle [1942] 1 K.B. 66, In re Sweeney and Kennedy’s Arbitration, Analog Devices; [49]see furtherGrehan v. The North Eastern Health Board [1989] I.R. 422;Carroll v.An Post National Lottery Company [1996] 1 IR 443;Ahmed v. Health Service Executive [2007] 2 IR 106; [50]see furtherGrehan;Ahmed; [51]see furtherCarroll; [52]see furtherCarroll; [53]see furtherICDL.

Coonan v. A.G.

[2001] IESC 48; [2002] 1 ILRM 295 (29th May, 2001)
THE SUPREME COURT

RECORD NO 56/01

MURPHY J
GEOGHEGAN J

[JUDGMENTS FROM MURPHY AND GEOGHEGAN JJ.; FENNELLY J. AGREED WITH GEOGHAN J.]

JUDGMENT OF MR JUSTICE FRANCIS D MURPHY DELIVERED THE 29 TH DAY OF MAY, 2001.
_______________________________________________________________________

1. Charles Coonan, the above named Plaintiff (Mr Coonan), was appointed as State Solicitor for the area of North Kildare/ Wicklow in August, 1974, upon the terms of a document described as “Conditions of Appointment” dated the 14th day of August, 1974. The first paragraph of that document was expressed in the following terms:-

“1 The State Solicitor shall be entitled to hold the office of State Solicitor for the above area until he shall attain the age of 65 years but, provided that he is then in good health, the age of retirement may be extended by the Attorney General, with the concurrence of the Minister for Finance, to any age not exceeding 70 years. The State Solicitor shall be removable at any time, by order of the Government made on the certificate of the Attorney General, for misconduct, incapacity, neglect of duty, physical or mental infirmity, or any other cause which, in the opinion of the Attorney General, would render him unfit to perform the duties of a State Solicitor. The certificate of the Attorney General in respect of any of the aforesaid matters shall be binding on the State Solicitor. The appointment will carry no right to pension or compensation on termination.”

2. Unquestionably it had been the invariable practice before 1974 and for at least 20 years thereafter for a year by year extension to be granted up to the age of 70 years to any State Solicitor who applied for it. Mr Coonan was well aware of that practice.

3. On the 14th of January, 2000, Mr Coonan, who would attain the age of 65 years on the 5th November, 2000, applied for renewal. He met with the Chief State Solicitor in the same month who told him he was not going to be renewed after the age of 65 years. The Attorney General on the 5th February, 2000, in accordance with a change in policy, made a decision that no extension should be granted. On the 18th February, 2000, the Director of Public Prosecutions informed Mr Coonan that there would be no extension and by letter dated the 7th of March 2000 the Chief State Solicitor gave formal notice to that effect.

4. On the 4th October, 2000, Mr Coonan instituted plenary proceedings claiming a declaration that he was entitled to continue as State Solicitor for the area to which he had been appointed and an injunction restraining the Defendants from appointing any person as State Solicitor in his place. In addition to other relief, Mr Coonan claimed damages for breach of contract.

5. In the statement of claim delivered on the 13th November, 2000, Mr Coonan having asserted the material facts to which I have referred went on to say:-

“7 The plaintiff is and remains state solicitor for the area of North Kildare/ Wicklow and at all material times hereto relied upon the conditions of his appointment and the terms both expressed and implied of his appointment and the practice heretofore in respect of extensions to state solicitors appointed by way of similar conditions of appointment. The plaintiff has acted to his detriment and loss in the legitimate expectation that his appointment would be extended pursuant to his conditions of employment until he attained 70 years of age.

8 The defendants have in breach of the conditions of appointment and the terms expressed and implied therein failed to extend the plaintiff’s employment having been lawfully called upon so to do by the plaintiff pursuant to his conditions of appointment.”

6. The defence might be summarised by saying that the Defendants admitted the facts alleged in the statement of claim but denied the inferences and conclusions of law drawn therefrom. In particular the Defendants contended that the conditions of appointment conferred on the Attorney General “a lawful discretion” to extend the Plaintiff’s age of retirement with the concurrence of the Minister for Finance to any age not exceeding 70 years: that such discretion had been exercised lawfully to extend the Plaintiff’s age of retirement up to and including the 31st January, 2001, but no further. In the reply delivered on the 14th December, 2000, Mr Coonan denied (among other things) that the Attorney General had lawfully exercised the discretion aforesaid.

7. Because of the urgency of the matter for both the Plaintiff and the Defendants the matter was processed with commendable speed. It was heard by Ms Justice Carroll on the 23rd and 24th of January, 2001, and she delivered her judgment on the 31st of January, 2001, in pursuance of which it was ordered that Mr Coonan was entitled to recover against the Defendants damages in the sum of £100,000 together with the costs of the proceedings. It is from that judgment and order that the Defendants appeal to this Court.

8. The Defendants/Appellants submitted that no term could be inferred into the contractual relationship between the parties which would be inconsistent with the discretion expressly conferred upon the Attorney General . It was argued – and the evidence appears to have supported the fact – that Mr Coonan had not altered his position to his detriment as a result of the established practice concerning extensions and consequently a claim based on estoppel could not succeed. The Appellants submitted that an issue of legitimate expectations could not arise in what was in essence a commercial contract between the Attorney General and a solicitor for the provision of legal services by the latter. However, the main thrust of the argument made by Counsel on behalf of the Appellants was that nowhere – not in the pleadings, the particulars furnished or the written submissions in the High Court or this Court – had Mr Coonan specified the nature, scope or terms of the right on which he relied. Mr McDonagh, SC, for the Appellants, pointed out that the judgment of the learned trial Judge did not identify any such right. Mr McDonagh posed the question which was not merely rhetorical but, in the existing circumstances, hypothetical, namely:-

“If the claims of the Plaintiff were upheld and the matter referred back to the Attorney General to make an appropriate determination what standard, criteria or procedure would the Attorney General be required to apply or adopt?”

9. As the post held by Mr Coonan had been filled before Ms Justice Carroll delivered her judgment the possibility of referring the matter back to the Attorney General was not then a realistic option. Less still could that procedure be adopted now. Nevertheless it is, in my view, the difficulty in answering the hypothetical question which underscores the infirmity in Mr Coonan’s case.

10. It was conceded by Mr Condon, SC, on behalf of Mr Coonan that the word “may” in the Conditions of Appointment conferred on the Attorney General a discretion. Rightly, in my view, Mr Condon did not seek to argue that the word “may” should be interpreted as “shall”. What then is the limitation on the exercise of this discretion? Was it to be inferred that the Attorney General would afford every outgoing state solicitor an opportunity of being heard in relation to the decision to extend his term of office in a procedure analogous to that required by the decision of the House of Lords in The Council of Civil Service Unions .v. The Minister for the Civil Service [1985] AC 374. Did the alleged rights of Mr Coonan go beyond the merely procedural? Was the Attorney General bound to review the conduct and capacity of Mr Coonan and, if so, by reference to what standard? Did the Attorney General owe any duty to the office holder in relation to the exercise of the contracted discretion? Mr McDonagh explored some of these possibilities but with understandable frustration. He did not know with any degree of particularity the term which Mr Coonan claimed was implied in the contract or the restrictions allegedly imposed on the exercise by the Attorney General of his discretion.

11. The learned trial Judge understandably expressed concern for Mr Coonan having regard to the impact of the Attorney General’s decision on his career and expressed her conclusions in law in the following terms (at page 11 of the transcript):-

“I am not saying that the Attorney General could not change the policy of renewal on request, health permitting. But I do say that he was not entitled to change this long standing custom, rule or policy, by whatever name it was called, and relied upon by Mr Coonan, without giving adequate notice to enable him to arrange his affairs to cope with this alteration in his life plan. The two extra months given as a conciliatory gesture were wholly inadequate.”

12. It is difficult to reconcile that conclusion with the discretion expressly and admitted conferred on the Attorney General by the conditions of his appointment. It seems to me that this decision necessarily involves the substitution of an obligation for a discretion subject to the qualification that the discretion could be restored to the Attorney General on his giving reasonable, but undefined notice, to Mr Coonan and presumably all other State Solicitors. I cannot envisage the officious bystander postulated in Shirlaw .v. Southern Foundries [1926] LDD 1939 2 KB 206 (and more recently by this Court in Carna Foods Ltd .v. Eagle Star Insurance (Ireland) Ltd [1997] 2 IR 193) suggesting a provision to that effect. Less still could I envisage either party testily suppressing his intervention with a common “Oh of course”. At the very least such a suggestion would give rise to debate and the very existence of debate would preclude the implication of the suggested term. Nor can I see any basis on which the ill defined and inadequately explored doctrine of legitimate expectations could be invoked so as to prevent successive Attorneys General exercising or declining to exercise the discretion expressly reserved to them simply because a practice or pattern could be identified which indicated that for many years the discretion had in fact been exercised one way rather than another. Even in that context the question would arise “What was it that the office holder was led to expect?”. The much quoted case of Webb .v. The Attorney General [1988] 1 IR 353 Finlay CJ (at 384) seems to have cast doubt upon the existence of any such right of action when he said:-

“It would appear that the doctrine of “legitimate expectation” sometimes described as “reasonable expectation”, has not in those terms been the subject matter of any decision of our courts. However, the doctrine connoted by such expressions is but an aspect of the well recognised equitable concept of promissory estoppel (which has been frequently applied in our courts), whereby a promise or representation as to intention may in certain circumstances be held binding on the representor or promisor.”

13. It was in that context that Finlay CJ quoted with approval certain passages from the judgment of Lord Denning MR in Amalgamated Property Company .v. Texas Bank [1982] QB 84 on which considerable reliance was placed by Counsel on behalf of Mr Coonan. In his judgment in Wiley .v. The Revenue Commissioners [1993] ILRM 482 Mr Justice O’Flaherty repeated the observations which I have quoted from the judgment of Finlay CJ in the Webb Case and went on to analyse the evolution of the doctrine of legitimate expectations. In concluding that it had no application to the claim of the plaintiff to the repayment of excise duty in accordance with certain representations made to him O’Flaherty J said (at page 494):-

“The appellant is not concerned with seeking fair procedures in the sense of submitting that he should have been heard by the Revenue Commissioners before they changed their evidentiary requirements in relation to the granting of a refund. Rather does he submit that he should continue to have conferred on him a substantive benefit by way of exemption in the circumstances that he was not informed in advance of the more stringent requirements that the Revenue Commissioners had put in place to satisfy themselves so that they could properly discharge their duty in accordance with the scheme they had set up under the relevant legislation. It will be clear immediately that acceptance of this admission would involve a radical enlargement of the scope of legitimate expectation. It would involve the courts saying to the administration that it was not entitled to set more stringent standards, so that it might discharge its statutory obligations, without giving notice to anyone who might have benefited in the past from a more relaxed set of rules. Stated thus, I believe it would involve the courts in an unwarranted interference with the actions of administrators. Our constitutional system is based on the separation of powers and just as the judicial organ of State requires the respect of the legislative and executive branches of Government, so must the courts exercise proper judicial restraint.”

14. Even if the relationship between the Attorney General (or the Director of Public Prosecutions) and a state solicitor is to be seen as a matter of public law to which the doctrine of legitimate expectations applied, it would seem to me that the judgment of Mr Justice O’Flaherty would preclude Mr Coonan obtaining any substantive benefit.

15. At the end of the day the learned trial Judge awarded Mr Coonan a sum of £100,000 by way of damages. Of course the trial Judge had been placed in the difficult position that Mr Coonan could not be restored to his post so that any review of his circumstances by the Attorney General would have been meaningless. At the same time, Carroll J had received evidence that the remuneration of state solicitors had been, or was about to be, increased to £35,000 per annum. The award of £100,000 therefore would appear to represent effectively the full value of a claim for wrongful dismissal on the basis that the “employee” was entitled to three years notice of termination. Indeed recognising that Mr Coonan had given evidence, that in the event of his ceasing to be State Solicitor, he would discontinue the employment of one typist, it may be that the award represented the full amount of the loss which Mr Coonan would sustain over a period of five years. If the notice which it was held that he was entitled to receive of any change of policy was, say, twelve months – which would be the longest period that one could envisage as appropriate notice to determine a contract of employment from year to year – that computation could not be justified.

16. Whilst I share entirely the views of the learned trial Judge as to the harshness of the decision of the Attorney General and the effect which it had upon the understandable – if not legitimate – expectations of Mr Coonan, I do not accept that the Plaintiff has made out a case in law to recover damages for breach of contract or otherwise against the Defendants. I would allow the appeal.

THE SUPREME COURT

Murphy J.
Geoghegan J.
Fennelly J.
Record No. 56/01

BETWEEN

CHARLES COONAN

Plaintiff

and

THE ATTORNEY GENERAL AND IRELAND

Defendants

Judgment of Mr. Justice Geoghegan delivered the 29th day of May 2001

17. On the 14th of August 1974, the plaintiff was appointed State Solicitor for the area of north Kildare/Wicklow. As in the case of all State Solicitors since the foundation of the State until quite recent times the plaintiff was required to sign a document under which he agreed to accept and comply with certain specified conditions of appointment. These were the same conditions of appointment as were invariably used. For the purposes of this appeal, it is not necessary to consider the exact legal nature of the office of State Solicitor. Even if, for some purposes, his office might be regarded as being governed by public law (and I am expressing no opinion whatsoever on this matter) it is the contractual terms of his appointment and matters arising therefrom which are in issue in this case ,which was an ordinary action commenced by plenary summons and not, in any sense, an application for judicial review. For the most part in so far as the action is founded directly on contract paragraph 1 of the conditions of appointment is the relevant provision. I think it best to set out that paragraph and then in the light of it explain what the issues between the parties are. Paragraph 1 reads as follows:-

“The State Solicitor shall be entitled to hold the office of State Solicitor for the above area until he shall attain the age of sixty-five years but, provided that he is then in good health, the age of retirement may be extended by the Attorney General, with the concurrence of the Minister for Finance, to any age not exceeding seventy years. The State Solicitor shall be removable at any time by order of the Government made on the certificate of the Attorney General, for misconduct, incapacity, neglect of duty, physical or mental infirmity or for any other cause which, in the opinion of the Attorney General, would render him unfit to perform the duties of State Solicitor. The certificate of the Attorney General in respect of any of the aforesaid matters shall be binding on the State Solicitor. The appointment will carry no right to pension or compensation on termination.”

18. When the plaintiff was reaching the age of sixty-five years he applied, as most of his colleagues had done over many years, for an extension. Apart from a very minimal extension which the plaintiff was ultimately given this was refused and it was refused on the grounds of a new policy which the Attorney General was adopting. That policy was that there would be no more extensions after the age of sixty-five years unless there were exceptional circumstances. I do not find it necessary to set out in this judgment the history of how this policy came about. It is sufficient to state that the policy was decided upon.

1 In the High Court and on appeal in this court the plaintiff essentially makes two alternative cases which are:-

(1) That once there was no problem with the plaintiff’s health there was in all the circumstances a breach of contract on the part of the Attorney General in not granting the extension.
(2) Even if there was technically no breach of contract the Attorney General was precluded from refusing to renew by virtue of the doctrine of promissory estoppel and/or legitimate expectation.

19. There is a further refinement to be made in relation to issue No. 1. The contractual issue was argued on behalf of the plaintiff in the High Court effectively on two alternative fronts though it was never put like that. As it happens, the books of transcript from the High Court include argument as well as evidence and it emerges from Book 1 of the transcript that Mr. Condon, S.C. opened the case on behalf of the plaintiff on the basis that the Attorney General was contractually obliged to grant the extensions provided that there was no health problem and that the word “ may” in the first sentence of Condition No. 1 connoted merely an enabling provision allowing the Attorney General actually to grant the extension in such circumstances. On this interpretation the Attorney General would have no discretion. The question of the role of the Minister for Finance has never really featured and I think that it would be accepted by all sides that it would be fiscal matters with which the Minister for Finance would be concerned and I do not think that his role is relevant to the issue.

20. Mr. Ercus Stewart, S.C., also acting for the plaintiff, argued the contractual points slightly differently in his closing of the case in the High Court. At p. 108 of Book 2 of the transcript he is reported as having said as follows:-

“What the State is alleging is that some time in 1999, they adopted a policy or a rule – the words are both used – changing it, and I would submit, Judge, that if there was a discretion, that the discretion is clearly being … totally being done away with, or fettered by a general rule or policy that only in exceptional circumstances, and the two – and the word two, Judge, they became three a few moments ago, and they are back now to two. They were related to the particular State Solicitor’s office and the work being done at the time. You can call them three situations or two, but it is two or three. But they each relate to the particular job, the particular office being served, and they clearly are matters of benefit to the State.”

21. While therefore Mr. Condon was making the bolder argument that there was no discretion left to the Attorney General, if there was good health, Mr. Stewart was modifying that somewhat by arguing that even if the Attorney General did have a discretion under the contract, he was not contractually permitted to adopt a policy fettering his own discretion. At the hearing of the appeal Mr. Condon ultimately conceded that the Attorney General did have some discretion.

22. Carroll J., in the High Court, delivered a reserved judgment in which having referred to the evidence of a former Chief State Solicitor, Mr. Dockery, and the State Solicitor for Limerick, Mr. Murray, who was also President of the State Solicitors Association, which was to the combined effect that over many years renewals were more or less routine, she expressed strong adverse views as 1to the manner in which the plaintiff had been treated by the State and she held in his favour. The defendants have appealed that decision to this court. Carroll J., in her judgment, chose not to analyse what exactly the contractual terms were but preferred to base her decision on estoppel arising out of the manner in which the Attorney General, over many years, had exercised his contractual discretion. At p. 10 of her judgment she said the following:-

“This case seems to me to fit four square within the doctrine expressed by Lord Denning M.R. in Amalgamated Property Company Limited v. Texas Bank [1982] Q.B. 84 and referred to by Finlay C.J. in Webb v. Ireland [1988] IR 353:

‘Where the parties to a transaction proceed on the basis of an underlying assumption either of fact or law, whether due to misrepresentation or mistake makes no difference, on which they have conducted the dealings between them neither of them will be allowed to go back on that assumption when it would be unfair or unjust to allow them to do. If one of them does seek to go back on it the court will give the other such remedy as the equity of the case demand.’

23. Counsel for the Attorney General, Mr. McDonagh, S.C., argued very forcefully by reference to case law that the doctrine of legitimate expectation had no place in private law but only in public law. But in view of the fact that the Amalgamated Property Company Limited was a private law case and not a public law case, I do not think that this issue really arises. It would seem that it was more on the basis of estoppel than legitimate expectation that the learned trial judge came to her decision.

24. Mr. McDonagh also drew to the attention of the court difficulties in the way of the plaintiff succeeding on the basis of estoppel and these are referred to in the judgment of Murphy J., but as I have formed the view that the plaintiff is entitled to succeed at any rate on foot of his contract with the Attorney General, I do not find it necessary to consider the application of the principles of estoppel.

25. I return therefore to the contract. It may be at least arguable, as originally suggested by Mr. Condon, that the Attorney General was contractually obliged to renew subject only to health problems but I am inclined to the view that that is not a correct interpretation, having regard to the use of the word “ may”. I find it difficult to follow how the word “ may” in the context could connote merely an enabling provision. In this exercise one is not construing a statute or a statutory instrument and it would be absurd to suggest that Mr. Coonan could enable the Attorney General to do something. I am satisfied, therefore, that over and above the health question the Attorney General does have a residual discretion which could be exercised against renewal in particular circumstances and in a particular case. But I am in complete agreement with the more modified contractual argument to the effect that the Attorney General was not entitled to introduce a blanket policy. When I say that he was not entitled to do so, I mean that he was not contractually entitled to do so. Obviously, the Attorney General can have any kind of policy and, indeed, such a policy may well have been very sensible. But he may, in any given instance, be precluded contractually from implementing it. I believe that that is the case here. During all the years that the plaintiff was a State Solicitor he might have from time to time looked at his own contract, and if he did so, it would have been clear to him that by the plain words of Condition No. 1 he was given, at the very least, the hope of being considered for renewal on his own individual circumstances if he should make an application for renewal after sixty-five. It would never have occurred to him that that discretion in the Attorney General for which he had been guaranteed in the contract would be at the relevant time effectively removed. In order to construe Condition No. 1 in this way, I do not think that it is necessary to imply any term. This would seem to be the natural interpretation of the express term but if it is necessary to imply a term, I would have no hesitation in doing so. It must surely have been an attractive feature for most applicants for State Solicitorships over the years that they would have the expectation, or at the very least, the reasonable hope that they could remain at the job until seventy. The absence of any pension made this of considerable importance.

26. I am firmly of opinion, therefore, that the Attorney General has been in breach of contract and I agree with the view of the learned trial judge that the only practical remedy now is damages. It is not entirely clear how Carroll J. arrived at the figure of £100,000, but I think that it was a reasonable figure. She had evidence before her of the annual salary which the plaintiff was receiving, a figure in the order of £27,000 and she had been told that a substantial increase was likely to emerge from the report of the Buckley Review Body. That report was published shortly before the judgment and it did recommend increases which would have brought the salary, if implemented, to £35,000. I do not think that the learned trial judge was making an exact calculation of loss of earnings. In arriving at her figure, the learned trial judge was entitled to have regard to the earnings. While there could have been no guarantee that the plaintiff would have been retained till seventy even if the Attorney General properly exercised his discretion, the learned judge was entitled to weigh up the probabilities especially in the context that the Attorney General had elected to defend the action solely on the basis of policy with no suggestion of ill health or unsuitability on the part of the plaintiff. In all the circumstances, the justice of the case is met by the award of £100,000 and I would, therefore, dismiss the appeal.

The Law Society of Ireland v The Motor Insurers’ Bureau of Ireland

45/2016 (WLIE 2)

Supreme Court

25 May 2017

unreported
[2017] IESC 31/2
Mr. Justice John MacMenamin

May 25, 2017

In the Matter of an application by the Accountant of the Courts of Justice pursuant to the Insurance Act, 1964 (as amended by the Insurance (Amendment) Act, 2011

JUDGMENT
1. I agree with the judgment delivered by Clarke J. I would like to make certain additional comments in relation to the approach to interpretation so elegantly set out in my colleague O’Donnell J.’s judgment. In essence one can safely say that the starting point for the different approaches in these judgments is how this agreement should be interpreted. I confine my observations to only a few points.

2. The parties to this case both approach it on the basis of accepting the law as set out in Investors’ Compensation Scheme v. West Bromwich Building Society [1998] 1 WLR 896 (HL) (“ICS”) and as subsequently approved in Ireland. In ICS Lord Hoffman set out the following general principles:

1. The Court must consider the meaning a document would convey to a reasonable person having all the background knowledge that would reasonably have been available to the parties at the time the document was made.
2. This background knowledge includes all relevant factual information that is available to the parties, and which would have affected the way in which the language used in the document would have been understood by a reasonable person.
3. Pre-contractual negotiations, however, are excluded from this background information.
4. The meaning of a document may not be the same as the meaning of the words used. The Court can and should attempt to ascertain what the words were intended to convey as opposed to their literal meaning.
5. Whilst parties must be taken to have used the words they did for a reason, it may be possible to conclude that something has gone wrong with that language and the Court must attempt to give effect to what the parties meant to say.
3. There is, of course, much that is attractive in such an approach. It is predicated on the proposition that courts should enjoy a significantly wider ambit in order to interpret contracts in a more contextual manner. It allows a court to impart business commonsense to agreements. But in law, context is not in fact “everything”. Lord Steyn’s observation to that effect in R. v. Sec. of State for the Home Dept. Ex P Daly [2001] All ER 433 at para 28 must even itself, be seen its own context, i.e. in a discussion as to the basis for judicial review in English law. Context matters a very great deal. But it must not be elevated so high as to defeat textual indications pointing to a different conclusion. For the purpose of this case context can be understood only in light of what the parties to the agreement understood at the time the agreement was made. But one cannot exclude past events from their contemplation these past events are discussed in Clarke J.’s judgment. This is discussed in Clarke J.’s judgment. There is a very real risk that in applying the ‘business commonsense’ test, which is inherent to the I.C.S. approach, a court may be tempted to find what the parties should have agreed , rather than what they actually agreed; or to give some retrospective meaning to what was left ambiguous in an agreement.

4. What is noteworthy about the two, fully reasoned, judgments of my colleagues is the extent to which, by attributing different weight to the five considerations set out in ICS one can arrive at diametrically opposed conclusions. This to my mind raises questions about how helpful, what may characterised as the “ICS criteria” always are, unless those criteria are operated within some ‘rules’ as to the manner in which they are to be weighed and utilised in any particular situation. Granted, the agreement is ambiguous in the sense that all the clauses do not mesh together consistently. But I think the fundamental question is what is the gist of the most important part of the agreement? Does it create liability? In my view it does. That most important part is clause 4.1.1 even in its broad terms. Does it create liability against MIBI? In my view it does.

5. In analysing any agreement, the Court may want to ask itself the question “could these parties, negotiating a particular contract have possibly meant what the contract now appears to say?” But this is not always the right, or the only, question. What must be truly in issue is what the parties actually agreed . To my mind a court must look at the words and context. But the value of the words used cannot be discounted to the point where context becomes a form of “trump card”, where there is always the risk that hindsight dictates what the parties should have agreed rather than their actual common intention. There is a risk that a mis-located or overemphasised ‘contextualisation’ process can defeat explicit words and material facts. An “imputed” context can be too narrow; when, in fact, there is a necessity that, in a broader, historical and contextual analysis, more weight should be given to the actual words used by the parties. I think this is so here.

6. I am concerned as to what are the limits which can be placed on the criteria of contextualisation and business commonsense. There may be many potential ‘moving parts’, but what are the fixed parts or rules regarding weighting each of the criteria? I admit this is not always an easy question. To my mind, the case for adopting the “chronological approach” from 1955 onwards, for assessing the 2009 agreement as advocated by counsel for the Law Society has real persuasive force. It allows for a fuller, and more telling, range of materials to be taken into account. The analysis retains its force despite the amendments and alterations which took place to the agreement. Bearing in mind those successive amendments one might rhetorically ask why, if the parties were prepared to change other parts of the agreement, did they not amend clause 4.1.1 as quoted in Clarke J.’s judgment? They had ample opportunity to do so. The question becomes more pertinent when one looks to the MIBI’s financial statements which, up to 2013 made allowance for insurers’ insolvencies. It goes very far to simply say this was an error. Even if it was an error did it not represent the MIBI’s own contemporaneous understanding of its potential liability in the event of an insurer’s insolvency?

7. The agreement, and its predecessors, were negotiated by people who work, both now, and in the past in the world of insurance, and by those officials who seek to regulate that world. People who work in this area are well familiar with the contractual principles of contra proferentem and material non-disclosure. The fact that the negotiating personnel may have changed is immaterial. Institutions and corporations do not “forget” things.

8. There are real contrasts therefore with the facts of I.C.S . The identity and the state of knowledge of the parties here is very different from those in that case. The Court is here dealing with persons very familiar with the concept of words having ‘meaning’ in Lord Atkins’ celebrated phrase in Liversidge v. Anderson, [1941] UKHLI and with people for whom the omission of words have a real consequence. All the negotiating parties had and have a common characteristic that is a desire to avoid ambiguity when it could be avoided. Yet clause 4.1.1 remained unaltered. It is to be recollected that pace Lord Hoffman’s homely metaphor, the Court is not here dealing with a private inter partes agreement; but rather one with a strong “public” law aspect. This is part of the broader context also.

9. These concerns become more acute when there are other pieces of material in the broader context which might indicate quite clearly that insolvency of an insurer was consistently in the minds of the respondent. Many of these are outlined in Clarke J.’s judgment.

10. I would add to these, what is to be found in what is termed the ‘Domestic Agreement’ made on the 1st January, 1993 between the Motor Insurers’ Bureau of Ireland (“MIBI”) and the various insurers and underwriters who were its members. This was part of the material made available to the Court.

11. This agreement was to be seen in light of the fact that the MIBI was at the time about to enter into what is called the “Uniform Agreement” with the bureaux of other European countries who were members of the Council of Bureaux. It implemented what are called the Geneva Recommendations, making uniform arrangements for owners and drivers of motor vehicles to be adequately insured against third party risk when entering foreign countries where insurance against such risks was compulsory. For that purpose, the MIBI wished to bind its members in relation to a definition of what would be the “insurer concerned” and also to define exceptions to that term. The agreement identifies relevant countries and deals with how judgments are to be satisfied.

12. Clause 7 provides that “where it appears expedient to the MIBI to settle or compromise at its discretion any claim arising out of a Road Traffic Act liability without allowing such claim to proceed to judgment, the MIBI should be entitled to recover its outlay from any member found to be insurer, or insurer concerned in relation thereto. Clause 8 allowed the MIBI to make calls or levies on the insurers who are members of the MIBI for such sums as the bureau might from time to time require in order to enable it to discharge its obligations or further its objects. The agreement sets out various provisos. It deals with both insurers and underwriters.

13. Clause 10 deals with the issue of “Insolvency of Member”. It provides

“(1) In the event of the insolvency of any insurance company any payments which MIB of I may as a result be called upon to make on its behalf to judgment creditors shall be contributed solely by the other Insurers’ Companies and in the event of the insolvency of an Insurance Underwriter all payments which MIB of I may as a result be called upon to make on his behalf to judgment creditors shall be contributed solely by the other Insurance Underwriters in each case the individual contributions being in the pro rata proportion mentioned in clause 8 hereof.
(2) It is agreed in the event of such payments referred to in clause 10(1) having to be made MIB of I will have the right to make a claim for a refund of such payments on behalf of its members against such liquidator, receiver, examiner or otherwise of such Insolvent Insurance Company or Insurance Underwriter”. (emphasis added)
14. Of course one can say these clauses should be seen within the particular context of the domestic agreement made in 1993. But I do not believe it can be tenably suggested that the MIBI did not at least have the insolvency issue on its mind then and subsequently. In my view this too must be part of the context.

15. I remain unconvinced that any of the subsequent amendments made after 1955 are such that they require a different interpretation to be put on the whole agreement from that which is readily discernible from clause 4.1.1. It is unnecessary to rehearse Clarke J.’s detailed analysis of that clause, or the other provisions or which the MIBI, now, seek to rely.

16. I should also express my concern that, in the ultimate, the application of “business commonsense” can, in certain circumstances be difficult to distinguish from subsequent rectification of a contract. At what point does business commonsense end and rectification begin, albeit with the benefit of hindsight? Part of the attraction of a “contextual approach” is that it can obviate injustice. But it can also create contractual uncertainty, or it can lead to an interpretation with the wisdom of hindsight.

17. In the neighbouring jurisdiction the contextual approach was applied in a number of cases after ICS (see Attorney General for Belize v. Belize Telecom [2009] UK PC 10; Transfield Shipping Inc. v Mercator Shipping Inc. [2008] UK HL48). But there is evidence that Lord Hoffman’s views have been the subject of some reassessment in the United Kingdom (see Arnold v. Britton [2015] UK SC; Marks and Spencer plc v. BNP Paribas Securities Services Trust Co. (Jersey) Ltd. [2015] UK SC 72.

18. In Arnold Lord Neuberger identified criteria which were relevant to the decision of the UK Supreme Court in that case. These were:

(1) Reliance placed on commercial commonsense and surrounding circumstances should not undermine the importance of the language and wording of the provision to be construed.
(2) The less clear centrally relevant words to be interpreted, the more ready the Court can properly be to depart from their natural meaning.
(3) Commercial commonsense is not to be invoked retrospectively.
(4) Whilst commercial commonsense is an important factor to be considered a court should be slow to reject the natural meaning of a provision simply because the consequences seem imprudent for a party. The purpose of interpretation is to identify what the parties have agreed, not what the Court considers they should have agreed.
(5) When interpreting a contractual provision one can only take into account facts or circumstances that existed at the time the contract was made and were known or reasonably available to both parties.
(6) In cases where an event subsequently occurs that was not intended or contemplated by the parties on the basis of the wording but it is clear what the parties would have intended, the Court will give effect to that intention.
19. At the minimum, this revisiting of the criteria raises a question as to the extent to which the courts in the neighbouring jurisdiction now see the I.C.S. judgment as the last word in this evolving area of law. It raises the question whether the same approach should unquestioningly be adopted in our courts with possibly far reaching consequences in the future. I fully accept that the agreement under consideration contains clauses which are apparently not consistent with clause 4.1.1. But to my mind, the critical question is not whether they are inconsistent, but whether they are sufficiently inconsistent in order to raise a real question as to how the agreement should now be interpreted?

20. The weight of the words in clause 4.1.1 although broad, and capable of more than one interpretation, ultimately to my mind only point in one direction. They favour the Law Society’s case. Counsel for the MIBI has, with considerable ingenuity, been able to construct a most capable argument whereby greater weight should be put upon those other clauses which are most helpful to his case. But the key question is, surely, whether any one or all of those clauses are sufficiently clear and decisive in order to displace the “working assumption” that should inform the Court’s interpretation induced by clause 4.1.1. In my view they are not.

21. In his dissenting judgment in Arnold v. Britton Lord Carnwath made the apposite observation that “ As Tolstoy said of unhappy families, every ill-drafted contract is ill-drafted ‘in its own way ’”. I do not deny this observation can be made in relation to the agreement under discussion. But there is nothing, even at this stage to prevent a further revision of the agreement. I would dismiss the appeal and uphold the three judgments of the Court of Appeal and that of the High Court judge.

22. I can see the force in the proposition that the outcome of this case may be detrimental to the insurance market, in Ireland and that there is an urgent need to address this question. I acknowledge, too, that the judgments of the courts below have serious implications for the MIBI levy on insurers. It is within the power of the parties to the agreement to further revise this agreement – if they wish. But that is not the point. To my mind the essential, determinative, issue is what the 2009 agreement conveys to the objective observer, rather than what the parties now wish they had agreed in light of the collapse of Setanta. I would affirm the judgments and order of the Court of Appeal.

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The Law Society of Ireland v The Motor Insurers’ Bureau of Ireland
45/2016
Supreme Court
25 May 2017
unreported
[2017] IESC 31
O’Donnell J.
May 25, 2017
In the Matter of an Application by the Accountant of the Courts of Justice Pursuant to the Insurance Act 1964 (As Amended by the Insurance (Amendment) Act 2011)
JUDGMENT
1 The legal ideal aspires to clarity, certainty and precision, but much of the business of the courts, particularly in the interpretation of contracts or statutes involves a consideration of ambiguity. Ambiguity however is not solely a feature of language. Rubin’s Vase is an image used in psychology but now well known. It is an ambiguous form that can be seen either as a vase or two symmetrical faces, but not both. Similarly, Wittgenstein apparently used an ambiguous image in the nature of a line drawing which could be viewed either as a rabbit or a duck to illustrate a distinction he sought to make between “seeing that” and “seeing as”. The provisions of the Motor Insurers’ Bureau Agreements (“the Agreement”) with respective Ministers for Transport between 1955 and 2009, are a much more humdrum example. But, as the extensive judgments in the High Court and Court of Appeal, and the detailed arguments in this Court all show, they too are ambiguous and their interpretation is to some extent also dependent on perception.
2 From the point of view of a person involved in a road traffic accident, and who seeks compensation from a driver who is under a legal obligation to have insurance against the risk of injury caused by such an accident, there is no relevant distinction between those cases undoubtedly covered by the MIBI Agreement of the uninsured or untraced driver or the drivers where cover has been repudiated, and the circumstances considered here, where the negligent driver has the benefit of an insurance policy, but the insurance company is insolvent and unable to provide the indemnity which it agreed. To the injured party, his lawyer and, perhaps, a Government minister concerned with public policy, these represent different ways in which for the victim of an accident, the reality of recovery can fall short of the promise of compulsory insurance of road vehicles. To an innocent party whose claim succeeds but who does not receive compensation, it is a matter of irrelevance precisely why an insurance policy is not available to cover the claim or all of the claim, and accordingly entirely sensible that a provision, in this case in the shape of an agreement with the motor insurers, should provide a safety net which ensured that injured claimants were not left uncompensated. From the perspective of a motor insurer, there is however a very significant difference between the industry accepting responsibility for compensation of claimants whose injuries are caused by an uninsured (or untraced) driver as a result of an accident, and on the other hand accepting liability for injuries caused by drivers who have insurance policies with a company which has become insolvent. The first is a risk which can be assessed, and indeed managed by encouraging enforcement of the law, and can be provided for by being priced into the premiums charged to customers. It will always necessarily be a fraction of the total claims exposure of a company and because it is spread across the market, it will have little competitive impact. As the evidence in this case shows however, acceptance of an obligation to make good claims which were required to be met by an insurer which has since become insolvent is of an entirely different magnitude and which could easily put at risk the solvency of the remaining insurers. The question for this Court is whether or not the Agreement is to be interpreted as covering claims to be met by an insolvent insurer. That in turn involves considering what the parties to the Agreement are to be understood to have meant when they made the operative Agreement in 2009, itself a successor to earlier agreements dating back to 1955. That task involves a consideration of the language used and the background facts, conscious also that such matters may take on a different complexion depending on the vantage point from which they are viewed.
3 This case has been the subject of detailed consideration in the High Court (Hedigan J.) ([2015] I.E.H.C. 564) and in three concurring judgments in the Court of Appeal ([2016] I.E.C.A. 60). The proceedings did not involve oral evidence, cross-examination or any dispute on the facts. However, while the facts are not in controversy, a dispute has raged over the manner in which such matters should be interpreted, and in particular the weight to be given to certain factors. I gratefully adopt therefore the account of the facts set out in the judgment of Mr. Justice Clarke. Accordingly, it will I hope be sufficient to identify the factors which I consider to be relevant and explain why on balance I have come to the conclusion that in this case the appellant’s (“the MIBI”) interpretation of the Agreement is correct.
The Factors
4 The relevant factors looked at neutrally, appear to be as follows:
• (i) The broad language of the Agreement, and in particular clause 4;
• (ii) The payment by the MIBI of certain claims in respect of the equitable insurance companies;
• (iii) The manner in which similar language in the UK agreement has been referred to in certain judgments;
• (iv) The terms of a note included in the accounts of the MIBI for 2012 and 2013;
• (v) The terms of a memorandum of Government in 1964 obtained from the National Archives;
• (vi) The provisions of s.3 of the Insurance Act 1964 (as amended) and as re-enacted as s.3(7) of the Insurance Act 2011;
• (vii) The headings of the MIBI Agreement;
• (viii) The interpretation of the Agreement attributed to the parties namely, the MIBI and the Minister;
• (ix) The terms of the Agreement providing for the operation of the Agreement in any particular case, and in particular clause 3;
• (x) The Memorandum of Association of the MIBI;
• (xi) Considerations of commercial common sense;
• (xii) The provisions and operation of the 1964 Act.
5 I think it is accepted that factors (i) – (v) broadly speaking favour the interpretation advanced by the Law Society, namely that the Agreement binds the MIBI to satisfy judgments obtained which have not been honoured in whole or in part by reason of the insolvency of an insurer. Factors (vii) to (xii) broadly speaking are in favour of the interpretation advanced by the MIBI, namely that that is, that the Agreement is limited to the satisfaction of judgments obtained in respect of uninsured and untraced drivers. Factor (vi) is relied on by both parties in support of their respective interpretations.
6 In my view however, it is not a simply question of assigning these factors to either side of the argument and explaining the weight which it is considered should be attributed to each factor and then considering on which side the balance lies. Since it is not suggested that there is any difference in understanding between the parties, the Agreement here has a single meaning, even if it is disputed. That is the meaning which both parties are taken to have agreed upon. That meaning is, however, to be determined from a consideration of the Agreement as a whole. What the Court must seek therefore is not an interpretation in which some aspects win out over others. Rather it is a case of providing an interpretation of the Agreement as a whole, which not only relies on those features supportive of the interpretation, but also most plausibly interprets the entire Agreement and in particular those provisions which appear to point to a contrary conclusion. Even if the majority of factors appeared to tend broadly to one side of the argument, that interpretation cannot be accepted if it is wholly and fundamentally irreconcilable with some essential features. To take a concrete example, the words chosen by the parties are obviously of particular significance. It may be that looked at in isolation all considerations of language, syntax and grammar strongly suggest that one interpretation is much more likely than another which is submitted. However, if the objectively more likely interpretation is plainly and unavoidably inconsistent with another provision of the contract in respect of which there is no ambiguity, then that itself is a strong indicator that another possible, if less objectively likely, interpretation of the clause was that which the parties intended and therefore agreed. Even then a court might still have to consider whether it was possible that the parties had simply managed to contradict themselves in the course of the same document. An agreement is an exercise in communication and there is a working, though by no means irrebuttable, presumption of coherence. It is important therefore to test any interpretation of a clause against the understanding of the agreement to be gleaned from what is said, and sometimes not said, elsewhere in the agreement.
7 Both parties and all the judges are in agreement that the operative principles are those set out at pages 114-115 in the decision in the judgment of Lord Hoffman in Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 All E.R. 98, and which has been adopted with approval in the Irish courts:
• (1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having 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.
• (2) The background was famously referred to by Lord Wilberforce as the “matrix of fact,” but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
• (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
• (4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. 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… .
• (5) The “rule” that words should be given their “natural and ordinary meaning” reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless 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. Lord Diplock made this point more vigorously when he said… :
“… 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 be made to yield to business common sense.”“
8 These principles represent a significant staging point in the development of what might be described as a modern approach to the interpretation of contracts, a development which, as the principles recognise, has not necessarily reached its terminus. The common law is treated as a coherent and consistent body of law developing incrementally by subtle changes, and only on occasion by sharp and dramatic turns. It is sometimes only after a period of time that the significance of a development is understood and it becomes apparent that the direction of the law has altered considerably. The modern approach to the interpretation of contracts is one which would probably be unrecognisable to, and might be regarded as heresy, by the Victorian judges who expounded so confidently on commercial matters. In my view, it is important to understand the full import of the changes wrought by the approach set out in Investors Compensation Scheme Ltd. v. West Bromwich Building Society. It is also necessary to be aware of the significance of this development for the overall approach to the interpretation of agreements, and not to simply mix and match authorities drawn from different eras and contexts, as if they were a body of coherent rules produced by a single author. For example, the “rule” that where a recital and an operative part of a deed conflict that the operative provision must prevail, is like the “rule” referred to by Lord Hoffman that words should be given their “natural and ordinary meaning”, no more than an expression of common sense about the manner in which we communicate. It is not an iron rule, particularly if it may not have been present to the mind of the parties when making their agreement. To take a homely example, if in agreement it is recited that a landowner wishes to have ragworts removed from a specified field, and the operative provisions says in general language that he will pay a certain amount per 100 ragworts delivered on a given day, no one would suggest that this entitles the other party to produce an unlimited number of ragworts from any other location and demand payment. In that case of course it might be said that there is no true conflict, but rather that the recital can be read harmoniously with the operative provision as indicating the scope of the agreement. But this itself illustrates the importance of approaching the Agreement in a holistic way rather than having immediate resort to case law.
9 A contract is a form of communication intended to convey the meaning agreed upon by the parties. Words are the vehicle through which that meaning is conveyed but the meaning of a document is much more than the meaning of the words. It is what the parties would reasonably have been understood to mean from a consideration of all the available guides to the meaning of the agreement. Words are an important and very often the only necessary guide to discerning the meaning, but they are only a guide, and as recognised by Lord Hoffman, they can be ambiguous, and sometimes even, as happens in real life, it may be apparent the parties have for whatever reason used the wrong words or syntax. In those circumstances, the words must give way.
10 Since much in this case turns on the approach to be taken to the apparently clear and broad language used in clause 4.1.1, I think it useful to consider in a little more detail the implications of the approach in Investors Compensation Scheme Ltd. v. West Bromwich Building Society. In a paper given to German patent lawyers, “Patent construction” (2006) CIPA Journal 727 , Lord Hoffman discussed this approach to interpretation. Patent law is traditionally seen as highly specialised and precise and technical. However he took a very homely example. He was standing at his kitchen sink doing the washing up when his wife suggested he should put on his umbrella. He hesitated only for a moment before opening a cupboard taking out an apron and putting it on. He continued at pages 727-728:
“If one looks in the dictionary, there is no way in which the word umbrella … can mean apron… Nevertheless I understood clearly what my wife was using the word umbrella to mean. I was in the kitchen, which has a roof, and anyway it was not raining, so she clearly could not have intended the dictionary meaning of umbrella. But an umbrella keeps you from getting wet and this suggested that she was concerned that I might get my suit wet while I was washing up the dishes. For that purpose, I usually wear an apron. So I concluded that she was using the word umbrella to mean apron. The reason why she chose that word does not particularly matter. It might have been some poetic fancy but more likely it was just a slip of the tongue. The point is that despite the dictionary, she succeeded in conveying the meaning which she intended.
This illustration tells us something important about language. It is a code which we use to communicate. The code has two elements: semantics, the meaning of words, and syntax … the order in which words are arranged. But when we try to understand what someone is saying, the code is only part of what we rely on. Enormously important is the background, the context, the knowledge already assumed to be shared between the speaker and listener, [and] the purpose for [which] the communication is being made. What we are trying to understand is not just the meaning of the words. That in itself is inadequate. The real object, as in the case of my wife’s remarks about putting on my umbrella, is to understand what the speaker intended to mean by using those words .
That was a case of someone conveying a meaning, clearly and unambiguously, although she has used the wrong word. In legal documents, including patent specifications, one does not often get people using the wrong words. Most patent specifications are very carefully drafted and you would certainly hesitate a long time before concluding that the background and context show the draftsman must have used the wrong word. However, if you do come to that conclusion, as sometimes you do, you give effect to what you think the draftsman was using the word to mean, irrespective of what the word means in a dictionary… . It would have been absurd if, standing in the kitchen, I had got out my umbrella. If you say that understanding your wife in ordinary conversation is different from construing patent specifications and other legal documents, I say that the only difference is that you will more readily start with the assumption that highly paid people drafting legal documents were using words in the ordinary dictionary meanings. But that is all.” [Emphasis added].
11 In this case, I consider that the words used in clause 4.1.1, are certainly capable of bearing the meaning for which the Law Society contends. It would be idle, and indeed dishonest to pretend that the arguments and considerations which persuaded the courts below, and which are set out so eloquently in the judgment Clarke J. delivers, are not strong and plausible. Indeed if this case had not been so well prepared and argued by both sides, it is conceivable that a judgment in favour of one or other of the parties might not have attracted notice or comment. But the parties here were well matched and have fought each other to a standstill through three courts, and it is necessary to make a decision. The background, the context, the knowledge shared between the parties, and the purpose for which the agreement was being made, all lead me to the conclusion that the MIBI Agreement was not intended to extend to cases where the defendant was insured, but his insurer has become insolvent.
12 Legal agreements are not poetry intended to have nuances and layers of meaning which reveal themselves only on repeated and perhaps contestable readings. Agreements are intended to express in a clear and functional manner what the parties have agreed upon in respect of their relationship, and the agreements often do so in a manner which gives rise to no dispute. But language, and the business of communication is complex, particularly when addressed to the future, which may throw up issues not anticipated or precisely considered at the time when an agreement was made. It is not merely therefore a question of analysing the words used, but rather it is the function of the court to try and understand from all the available information, including the words used, what it is that the parties agreed, or what it is a reasonable person would consider they had agreed. In that regard, the Court must consider not just the words used, but also the specific context, the broader context, the background law, any prior agreements, the other terms of this Agreement, other provisions drafted at the same time and forming part of the same transaction, and what might be described as the logic, commercial or otherwise, of the agreement. All of these are features which point towards the interpretation of the agreement, and in complex cases, a court must consider all of the factors, and the weight to be attributed to each. The reasonable person who is the guide to the interpretation of the agreement is expected not merely to possess linguistic skills but must also have, or acquire, a sympathetic understanding of the commercial or practical context in which the agreement was meant to operate, and perhaps even an understanding of the many ways in which even written, formal and legal communication falls short of the standard clarity and precision set by the early editions of Fowler’s Modern English Usage .
13 What might be described as the modern approach to interpretation probably owes something to a developing understanding of communication. But it is also a valuable correction to a disposition to make what might be described as the errors to which lawyers are prone. Precision in language is highly valued among lawyers and for good reason. It is an important skill that benefits clients when being advised as to transactions, and when on occasion such transactions give rise to legal disputes and litigation. Inevitably in such disputes and particularly one as extensive and contestable as this, there is an intense focus on the language and in particular the words used. It is important to remind ourselves however, that the process is not the deconstruction of a text, but rather the interpretation of an agreement. Parties undoubtedly seek clarity of language, but they do not do so as an end in itself. The focus of the parties is an agreement, normally commercial, which they consider is to their benefit. That is the context in which the words are used, and in which they must be interpreted.
14 It is also inevitable that when there is a dispute about an issue, that there is a tendency to approach the interpretation of an agreement through that dispute. In this case, it might be said that the question for the Court is whether the MIBI Agreement covers policies issued by insurers which have become insolvent. But it is an error, which can sometimes lead to the wrong result, to approach the interpretation of the Agreement solely through this focus. It is indeed rare that disputes on contractual interpretation address issues which are central to an agreement because, often if the matter is heavily negotiated, the parties will have a clear understanding of what has been agreed, and that will be reflected in the agreement. Much more difficulty arises when the issue, as here, is one which is not specifically addressed, discussed or negotiated. Although the question can be framed as to what the parties agreed about that specific issue, the true question is perhaps subtly different. It is necessary to understand the entirety of an agreement and then to consider what that means for the specific issue now raised. It is necessary therefore to see the agreement and the background context, as the parties saw them at the time the agreement was made, rather than to approach it through the lens of the dispute which has arisen sometimes much later.
15 I make these observations at the outset, because it appears to me that above all the argument about detail, a significant difference between those who, like me, consider that the Agreement does not extend to insolvent insurer claims, and those who take the contrary view, is a difference to the importance to be attributed to the words used in clause 4.1.1 The more those words are considered on their own, the easier it is to conclude that the insolvent insurer cases come within the Agreement. The more they are seen as a guide, albeit an important one, to the Agreement as a whole, the more possible it is to conclude that the Agreement, when properly construed does not cover those cases.
What Agreement is to be construed?
16 One issue which has arisen in this case is what Agreement is to be construed. There are a series of MIBI Agreements expressed to be supplemental on the original agreement of 1955. In a lucid and attractive argument, counsel for the Law Society argued that the correct approach to the interpretation in the clause in the Agreement, which had remained essentially unchanged since 1955, was to consider what it meant in 1955, and then to consider what if anything in the intervening time could alter that meaning. Attractive though it is, I do not agree that this is the correct approach. The agreement which we must interpret is the operative Agreement applicable at the time when the issue arose with the accountant of the High Court. Accordingly that is the 2009 Agreement. Where there is some ambiguity about the meaning of a clause, then it is entirely possible that it might be said that one interpretation was more plausible as of say 1955. However, if over the intervening years, the Agreement has been amended and supplemented in a manner which is strongly suggestive of the other meaning, or arguably only consistent with it, then the applicable Agreement in 2009 is or ought to be interpreted in that way. To return to Rubin’s vase, if in subsequent years the parties or their successors add eyes, teeth, and moustaches to the silhouettes, then the picture can only be of two faces however plausible the vase interpretation may have been initially. However, I agree that the fact that this is a developing agreement is important to its understanding in a number of different respects. The 2009 Agreement is nominally the product of the same parties as those which made the 1955 Agreement, but in reality entirely different people were involved. That in my view must be taken into account in considering the various forms of the Agreement. The development of the Agreement may also be relevant in a different respect. There is or may be a natural unwillingness to revise aspects of an agreement which have been found to work satisfactorily. At the same time, the fact that the Agreement is returned to on a number of occasions by the same parties represented by different persons, may be relevant in considering arguments relating to what has been described as business common sense. It is useful to ask, if at each renegotiation or amendment, whether the parties can be said to have intended to agree to the provision as interpreted.
17 A related issue in this case is that I think it is necessary to distinguish carefully between evidence which predates 1964 and that which postdates it. The existence of the Insurance Act of 1964 (“the 1964 Act”) and the fund it established are indeed key components in this case. While the interpretation of the MIBI Agreements is the issue debated here, the specific legal controversy is the contention that the accountant of the High Court should not make payments under the scheme of the 1964 Act. The question of the breadth or otherwise of the MIBI Agreement is not something to be considered in the abstract. The existence of the 1964 Act and the mechanism it creates is an important part of the context against which the MIBI Agreement must be construed at least thereafter. The 1964 Act on its face covers claims made in respect of Setanta insurance policies unless excluded by the terms of s.3(7) and the fact that payment can be made elsewhere. The MIBI Agreement for its part is certainly capable of covering such claims. The question therefore is the line between the two.
The issues raised by the structure of the proceedings
18 It is also important to keep in mind the somewhat unusual format of these proceedings. The origin of the case was the contention by the Law Society made to the accountant of the High Court that the MIBI Agreement covered claims made in respect of Setanta Insurance and that therefore the accountant should not make a payment. The accountant raised the matter and the President of the High Court directed a trial of the issue between the Law Society and the MIBI. However, these proceedings are not plenary proceedings. No discovery has been sought or oral evidence given. The information marshalled so impressively emerges from public sources. A court must be therefore a little more cautious in drawing general conclusions from the documents provided to it than might be case where discovery has been obtained and scrutinised by the parties.
19 The structure of these proceedings is important in another respect. The proceedings themselves are not, as would almost invariably be the case, between the two parties to the Agreement or their assignees or successors. Moreover the Agreement which is sought to be construed is itself unusual in that it is an agreement between two parties which confers benefits on third parties for whom it may be said the Law Society are a reasonable proxy. It has been observed that the nature of the MIBI Agreement is perhaps best understood as an agreement that the MIBI will not raise a privity objection if sued by a claimant. But in the context of this case, that raises a particular difficulty. The MIBI’s obligation is therefore not to raise a privity objection to any claim brought, which is itself within the scope of the Agreement. In this case the MIBI however takes a view as to the scope of the Agreement which does not extend to the Setanta claims. If the MIBI refused to satisfy any judgment and objected that any claimant did not have privity with it and therefore could not sue to enforce the Agreement, it would fall to the party to the Agreement, that is the Minister, to enforce it in favour of the third party. Otherwise, absent one of the recognised exceptions to the privity rule, it cannot be enforced. That is of particular relevance here, where it is contended that both parties to the Agreement consider that it does not extend to the Setanta claims or claims made in respect of insurers which have become insolvent.
20 This is connected to a further potential difficulty touched on in the judgment of Ms. Justice Finlay Geoghegan in the Court of Appeal. The origin of this case lies in the fact that there is now a disparity, not just in mechanism, but in amount between the liability of the Insurance Compensation Fund (“the insurance fund”), under the 1964 Act and the liability of the MIBI if it arises. In blunt terms, a claimant will be limited to 65% of a claim (and in any event capped at €830,000) if it falls to be dealt with under the 1964 Act regime, whereas the MIBI Agreement provides for effectively full recovery. It is indeed a useful thought experiment to consider how this question of interpretation would be approached if the situation was somewhat reversed and the insurance fund provided a full indemnity, but the MIBI Agreement did not extend to property damage. The Setanta claims undoubtedly fall prima facie within the scope of the Insurance Compensation Fund under the 1964 Act (as amended) since Setanta is an insolvent insurer. The structure of these proceedings is a contention made that the accountant ought not to make payment under the Act because it is contended that there is another source of payment here, namely the MIBI. However, even if the contention of the Law Society is upheld in this case that by itself does not ensure payment from the MIBI: all it does, negatively, is prevent payment from the Insurance Compensation Fund. Whether a claimant may recover from the MIBI in fact may depend in broad terms on whether the MIBI in the light of a judgment accepted that it was liable. Even then, there may be significant difficulties of procedure which may mean that even under the terms of the MIBI Agreement, strict compliance with which is a precondition to liability, there is no obligation to pay. In such circumstances, a claimant may not recover at all, or will be forced back to the fund with added delay and considerable expense. While the large and difficult issue involved in this case is whether the MIBI has a liability under the Agreement in general, these specific problems cannot be ignored in the resolution in the case.
21 Finally, there may be merit in applying a form of sense check to the legal analysis. What conclusions are to be drawn from the interpretation arrived at by the Court? As a matter of fact, how is it suggested that all the different factors occurred? Is it the case that the Court is being asked to accept that one or other party was oblivious to the meaning now contended to be agreed and that state of ignorance continued for 60 years, or is it suggested that the parties always understood that the Agreement would have certain consequences but now seek to deny that because of the scale of the potential liability? It is useful to articulate the factual theory upon which it is said that the interpretation of the contract is compatible with all the relevant evidence. That explanation should be capable of being tested against any of the factors. But it too must at least be consistent. If different explanations were provided for different aspects of the case, then that must at a minimum, raise questions as to the plausibility of the interpretation contended for. Thus, for example, it should not be possible to advance an interpretation that lays heavy emphasis on the words of a particular clause on the basis that they are the product of careful legal drafting, but discount the provisions of other parts of the agreement or suite of agreements produced at the same time. Those too must be assumed to be the product of careful drafting, and any inconsistency between them and the interpretation of the clause argued for must be addressed. Similarly it ought not to be possible to explain some aspects of the obvious difficulties in this case on the basis that the parties did not really realised the extent of the agreement they were making, but explain others, even tacitly on the basis that the parties did fully understand the scope of the agreement they were making, but now faced with liability, have both dishonestly sought to resile from that position.
22 It is now necessary to turn to the construction of the Agreement. As already indicated, I have come to the conclusion that the Agreement does not oblige the MIBI to cover claims made in respect of drivers whose insurer has become insolvent. In approaching that question it is necessary first to place the agreement in it commercial factual and legal context, keeping in mind the possibility that the Agreement may have a different appearance depending on the perspective from which it is viewed. This is not an exercise in context trumping words. Rather it is a process of interpretation of the text of an agreement seeking to reconcile so far as possible all the admissible evidence and arguments, so as to give effect to the Agreement the parties are to be understood to have made.
Commercial background
23 There is no dispute and less doubt that the Agreement certainly covers at least three classes of case: the untraced driver, the uninsured driver who never had a policy of insurance, and the driver whose policy has been repudiated. There may be a degree of overlap between these cases since in some at least of the cases of the untraced driver, the driver may have been uninsured. It is said by the MIBI that these represent a measurable risk which is to some extent controllable in that extra enforcement will have an impact upon the number of drivers who are uninsured, and in any event, it is possible to make an actuarial calculation of the likely cost in any given year which is itself likely to be a fraction of the overall cost of claims. Members of the MIBI are then called upon to contribute accordingly.
24 There is also no doubt, and it was not contested in evidence or indeed capable of being contested, that if the MIBI Agreement is held to cover claims made against the policy holder whose insurer has become insolvent, then that is not just a significantly different risk, but it is one which is potentially ruinous for the remaining insurers. The nature of insurance involves an assessment of risk, the period between receipt of premium and potential payment, investment return during that period, and the fixing of premiums to attract business which will be profitable. It follows that an insurer, who undervalues risk and offers reduced premiums, will attract more business. There is not only therefore an inherent risk that a company which miscalculates risk will become insolvent, but it is also likely to have acquired a very substantial segment of the market. The companies which have failed, and been the subject of payments through the insurance fund, namely the ICI, PMPA, and Quinn Insurance Ltd., all had substantial businesses and the amount of the deficiencies involved were very large indeed being €139m, €164m and €1.158bn respectively. In a substantial case, even if the MIBI made a call upon its members, it is likely that some of them would not be able to meet the call, in which case the burden would fall on the remaining insurers with a further possible domino effect. Indeed it is more likely that the MIBI as a limited company would simply be wound up. The irony would be then that on the Law Society’s interpretation, Setanta claimants would then fall back upon the insurance fund, but all other MIBI claimants would have no recourse. There is no doubt therefore that if the Agreement has the effect contended for by the Law Society, that it was an extremely foolish agreement to make on a professional level, and indeed to continue to supplement and renew on five occasions up until the most recent agreement in 2009. This is not a determinative factor since it is not unknown for commercial parties to make agreements that in retrospect are clearly unwise. Nevertheless, the commercial impact of the Agreement is a necessary part of the background since if an agreement is plainly foolish to the point of threatening the financial viability of the companies, then it is necessary to offer some plausible explanation why a prudent party (and in this case that involves all the motor insurers doing business in the State) would enter such an agreement and renew it over a period of 60 years.
25 A further feature is that while at one level the argument is that if the Agreement extends to claims made against insolvent insurers, that is only a further heading of coverage that it is necessary to recognise that it represents liability of a different sort and type. The categories of untraced/uninsured/repudiated cases, have a common feature in that they relate to actions of wrongdoing committed by a driver of a car. The driver of a vehicle whose insurer who later becomes insolvent, has done nothing wrong. Furthermore, the risk being covered is entirely different: on one case it is a risk that the driver will be uninsured, will leave the scene, or will breach the terms of his or her insurance. At one level, it is understandable that if insurers get the benefit of a captive market created by the desire that injured plaintiffs should not go uncompensated, that a corollary should be that they pay compensation in such cases. After all, if the uninsured drivers had complied with their statutory obligations, or the untraced drivers had been found, then the companies may have received a premium but they would still have this liability. In the case of a policy which has been repudiated, then an insurer has at least been prepared to take the risk of that driver, and therefore it is not unreasonable that it should be obliged to compensate a plaintiff if injured, and left to pursue its dispute with its own insured. In effect the claimant is protected, and the risk that the individual defendant will not be able to pay the damages is transferred from the injured party to the MIBI, but not removed. It is less clear why in principle insurers should also take on the risk of the insolvency of another insurer. Such an insurer is necessarily a competitor, and moreover one whose activity may have reduced the profitability of the solvent insurers. In such a case, it is perhaps not unreasonable that the insolvency should be borne by the general insurance market and the State in the same way as other claims against parties whose insurer is insolvent.
26 The MIBI has also made reference to the fact that the Agreement now satisfies an important State obligation under Directive 2009/103/EC which requires the State to make provisions for “a body to guarantee that the victim will not remain without compensation where the vehicle which caused the accident is uninsured or unidentified”. The CJEU in Csonka and Others v. Magyar Állam (C-409/11), confirmed that the Directive does not extend a compensation policy obligation to insolvent insurers. At paragraph 44, Advocate General Mengozzi identified the difference between the two classes of liability as follows:
“Lastly, I should also like to emphasise the important difference that exists, in my view, between a vehicle in respect of which the insurance obligation as described in Article 3 of Directive 72/166 has not been satisfied and a vehicle insured with an insolvent insurer. After all, a vehicle for which the insurance obligation has not been satisfied is an uninsured vehicle. A vehicle which was insured with an insolvent insurer has satisfied the obligation to secure insurance against civil liability in respect of the use of vehicles. The risk cover is genuine but the compensation is delayed by the financial situation of the insurer.”
27 The existence of the MIBI Agreement is linked to the provisions of s.76 of the Road Traffic Act, firstly of 1933, and subsequently s.76 of the Act of 1961, which made insurance of motor vehicles compulsory. A vehicle insured with an insolvent insurer has, as Advocate General Mengozzi observes, satisfied that obligation. As the Law Society points out, it is quite possible that in this one respect, Ireland has made a more extensive provision than was required by European law (though given the trend of the development of Irish law and even the development of coverage in respect of uninsured driving that seems unlikely). However, the analysis of the ECJ and Advocate General Mengozzi in Csonka is more important in my view in recognising that the liability of an insolvent insurer to victims of a road traffic accident is of a different order type and genus than the area covered by the Directive and by the agreed provisions of the MIBI of the uninsured/untraced/repudiated cases. If therefore, insurers and subsequently the MIBI agreed to extend their liability to insolvent insurers, then it is extremely unlikely that they could have done so advertently, and with an awareness of the potential liability that was being assumed. That is the commercial background which is relevant to the interpretation of the Agreement.
The words used
28 I think it is clear that the principal argument which persuaded the High Court and Court of Appeal that the Law Society was correct in its interpretation of the Agreement, was the apparent clear words of clause 4.1.1 of the Agreement. I will set these out with the emphasis attributed to them by the Law Society, in its submissions:
“Subject to the provisions of clause 4.4, if Judgment/Injuries Board Order to Pay in respect of any liability for injury to person or death or damage to property which is required to be covered by an approved policy of insurance under s.56 of the Act is obtained against any person or persons in any court established under the Courts (Establishment and Constitution) Act, 1961 (No.38 of 1961) or the lnjuries Board established by the PIAB Act 2003whether or not such person or persons be in fact covered by an approved policy of insurance and any such judgement is not satisfied in full within 28 days from the date upon which the person or persons in whose favour such judgement is given become entitled to enforce it then MIBI will so far as such judgement relates to injury to person or damage to property and subject to the provisions of this Agreement pay or cause to be paid to the person or persons in whose favour such judgement was given any sum payable or remaining payable thereunder in respect of the aforesaid liability including taxed costs (or such proportion thereof as is attributable to the relevant liability) or satisfy or cause to be satisfied such judgement whatever may be the cause of the failure of the judgement debtor.” (Emphasis added)
29 The MIBI has sought to suggest that the claim is a clause only about timing, or a subsidiary provision. I do not agree. As the Law Society suggests in its written submissions, clause 4.1.1 imports the essential nature of the obligation under the Agreement and cannot be said to be merely a timing matter or a subsidiary provision, not least, because there is no other liability clause.
30 It is clear that the wording of this clause was a significant factor in the courts below. For example, Ms. Justice Finlay Geoghegan recognised the difficulty of reconciling the Law Society’s interpretation with the other provisions of the Agreement, most notably clause 3.11 which permits for the assignment of a judgment and consequently its enforcement against the insured. However, she considered that that could not “require a construction of the liability of MIBI under the 2009 Agreement which is different to the meaning of clause 4.1.1 construed in accordance with the ordinary meaning of the words used in relevant background to the 2009 Agreement”. Again, she considered that “any inconsistency between the clause 3.11 and clause 4.1.1 could not alter the construction of the 2009 Agreement as a whole in accordance with the ordinary meaning of the words used by the parties”. In my view, this approach elevates the ordinary meaning of the words to a position which is not perhaps entirely merited. It is clear from the principle set out in Investors Compensation Scheme Ltd. v. West Bromwich Building Society, that if the ordinary meaning of the words would lead to a conclusion contrary to the intention which emerged from the rest of the Agreement and the relevant background, then those ordinary words must give way. Indeed, as was observed in that case, a court might come to the conclusion that the drafting had simply miscarried, and that notwithstanding the clear and unambiguous words used, that the parties cannot be held to be bound by such a meaning. Nevertheless, I agree since in any agreement words are used to convey meanings and to express agreement, very considerable weight must be given to them, and that taken on their face, they are certainly broad enough to support the contention of the Law Society that claims in respect of insolvent insurers are covered by the agreements.
31 However, it is important to note that the words used here are not specific . They make no reference to insolvency of an insurer and are not otherwise directed towards that case. This is not a case of reading umbrella as apron or phone as post. Rather the words of the clause are general and it is said that the breadth of the language must encompass claims made against insolvent insurers. This is important because the question becomes not only the meaning that may be attributed to such language, but also the intended field of application of the provision, which means considering the indications as to scope to be found in the entire agreement. On its face, the reading contended for by the Law Society suggests not merely that the Agreement is broad enough to cover claims in respect of insolvent insurers, but must also include claims against solvent insurers where for any reason payment is not forthcoming within 21 days of judgment. This could occur because of delay on the part of an insurance company, industrial action in relation to that company, or in other sectors of the economy which prevent payment being made, or for other reasons. What is inescapable is that the reading of the clause proffered by the Law Society in this case would make the MIBI a blanket guarantor of all claims, at least those in respect of which compulsory insurance was necessary. Of course this is not how the Agreement has been interpreted or applied. Claims are not routinely notified to the MIBI to maintain the possibility of executing under the MIBI Agreement against that company. However for present purposes, it is this broader interpretation that must be tested against the rest of the Agreement, and the commercial and other background factors to it.
32 The MIBI rely on three factors of the Agreement which they say are plainly inconsistent with such an interpretation. First, as already observed, they say that the language is general and not specific. It does not mention insolvency at all. Given the significant nature of such potential liability it is surprising, at a minimum, that it would not be specifically stated, particularly if the Agreement must be treated as having been carefully drafted to reflect the parties’ intentions. Although this point can be shortly stated, it is a powerful point nonetheless. Second, the preamble to the Agreement states:
“text of an agreement dated the 29th January, 2009, between the Minister for Transport and the Motor Insurers’ Bureau of Ireland extending, with effect from dates specified in the Agreement, the scope of the Bureau’s liability with certain exceptions, for compensation for victims of road accidents involving uninsured or stolen vehicles and unidentified or untraced drivers to the full range of compulsory insurance in respect of injury to person and damage to property under the Road Traffic Act 1961”.
Not only does the preamble not mention the liability for claims in respect of which the insurer has become insolvent, it plainly does not describe the Agreement in the broad terms which the Law Society’s interpretation would seem to require. It does not state that the MIBI is in effect a guarantor of all judgments for all road traffic act claims in respect of which compulsory insurance is necessary which have remained unpaid for 21 days. If we approach clause 4.1.1 as a carefully drafted provision, there is no reason to assume carelessness here, and the fact that the narrow and specific terms of the preamble are inconsistent with the broad and general interpretation advanced, is a serious obstacle to the interpretation advanced by the Law Society.
33 The Law Society offers two responses to this, one broader and one narrower. First, it says that no reliance should be placed upon the preamble because of the terms of the clause 4.1.1. It relies on the authority such as the judgment of Romilly M.R. in Young v Smith (1865) L.R. 1 Eq. 180 for the proposition that “where the recitals on the operative part of the deal are at variance, the operative part must be officious and the recitals inofficious”. In the Court of Appeal, Ryan P. agreed with this approach.
34 I cannot accept this argument. I rather question whether this Victorian certainty is applicable here at least to exclude the question in limine. The judgment cited expresses the common sense view that the parties will pay particular attention to the operative provisions of a contract, which are likely to be more specific than any generalisation in the preamble or recitals. Where there is a clear conflict between such general descriptive provisions and specific operative provisions, then effect will normally be given to the operative provisions applying that presumption. But the question here is whether there is such an inconsistency or rather whether the two can be read consistently which is what one would normally expect. Put more simply still, the question for the Court is perhaps why would the parties describe this Agreement in inadequate and misleadingly narrow terms, if indeed the Agreement has the broad and generous sweep for which the Law Society contends? To my mind, it is an inadequate answer to this question to merely cite Victorian authority.
35 The second answer the Law Society proffer is that the description in the preamble itself is plainly inadequate since even on the MIBI’s interpretation of the Agreement because it does not refer to cases where the insurer has repudiated liability. That is so, and this would be a reason for giving effect to the specific provisions of the Agreement which provide cover in that case. But that only highlights the fact that there are no such similar specific provisions in the Agreement dealing with the case of insolvency. Furthermore, it does not explain why the preamble does not describe the Agreement in the broad and comprehensive terms for which the Law Society must necessarily contend namely that it covers all claims subject to limited exceptions.
36 The third point made by the MIBI is that the Law Society’s interpretation is inconsistent with the specific provisions of the Agreement. Some of the procedures and provisions under the Agreement may be difficult, if not impossible, to satisfy in the case of insolvency even though it has been held that strict compliance with the Agreement is a necessary precondition to liability of the MIBI under it. This is particularly significant since the procedures in the Agreement are important, indeed central to it. It is very much an Agreement designed to put in place procedures to be followed to obtain recovery in certain cases. Thus, for example, where insolvency occurs after the accident and commencement of proceedings, and possibly even after judgment, it will have been impossible to comply with the prior notification obligations, and it may not have been the case that the parties complied with the obligation of notice in relation to any motion for judgment. This issue arises in the most acute form however in connection with clause 3.11 which the Court of Appeal acknowledged was the most difficult provision to read compatibly with the interpretation of that the Agreement provided for liability for claims in respect of which the insurer was insolvent.
Clause 3.11
37 Clause 3.11 provides in simple terms that on satisfaction of a judgment, the judgment is assigned to the MIBI. The purpose of this is of course to permit the MIBI to recover against the defendant in the proceedings. This is entirely logical in those general cases which the MIBI accepts are covered by the Agreement. The risk that an uninsured defendant may not be able to meet the judgment in favour of the plaintiff is transferred from the plaintiff to the MIBI. But the Agreement does not absolve the defendant who after all is culpable first in relation to driving, and second in failing to be insured in compliance with the statutory obligation, or leaving the scene of an accident (or both) or breaching the terms of his insurance so as to give rise to repudiation of the contract. The MIBI, having satisfied the claim of the innocent injured party is fully entitled to seek to recover from such a person if they have the means to make good the loss and clause 3.11 is a necessary step. However, in the case of an insolvent insurer, the driver is not at fault for the inability of the insurance policy to provide cover for the award fully, or perhaps at all, by reason of the insolvency of the insurer. However, if the Agreement applies to such a case, the plaintiff must have obtained judgment against that defendant, and clause 3.11 allows the MIBI to seek to recover the total amount of the judgment and costs from that person who if they have any means will then be at risk of losing their assets, including conceivably their home. It is accepted that this is an unjust outcome which the parties can hardly have intended. Thus the MIBI argue strongly that this is a reason to conclude that the parties did not intend that a broad reading be given to clause 4.1.1 and is instead consistent with the narrower reading suggested by the preamble that the Agreement was intended to cover only a limited class of cases.
38 It is important to emphasise that the focus on this aspect of the case, and the possible injustice to an insured who has an accident but finds himself or herself the subject of a claim by the MIBI, is not a question of seeking to weigh possible injustices. Obviously the person who is injured, in an accident caused in whole or in part by negligent driving is a victim not just of a legal wrong, but if the promise of compulsory insurance fails, and such a person cannot recover damages, then that person suffers a further serious injustice. Indeed the MIBI Agreement was introduced to address that problem in the case of uninsured or untraced drivers, at least. The focus on the possibility of recovery by the MIBI against the insured whose insurer has become insolvent arises however because it sheds light on the question of interpretation of the Agreement which this Court must consider. Given that one of the purposes of compulsory insurance is indeed to protect drivers from the costs of compensation which might otherwise be ruinous, it might be expected that if it was intended that there should be recovery from the MIBI rather than the insurance fund, then the parties to the Agreement would have addressed the apparent injustice of treating a person who has complied with the obligation to obtain insurance (but where insurer becomes insolvent after the accident) in the same way as a person who for example had not obtained insurance or left the scene of an accident. If we are to approach the provisions of one clause as the product of careful legal drafting, then once again the question arises: if the parties intended the Agreement to extend to such cases, why is there no reference to this situation, and why should it be assumed that the parties intended to leave an apparently unfair outcome in place? If the parties had in view the possibility of insurer insolvency why address the possible injustice to a plaintiff but not to the corresponding defendant? It would for example have been a simple thing to provide that in the case of a driver whose insurance company becomes insolvent that clause 3.11 shall not apply. One, and perhaps the most obvious answer to these queries is that the parties did not intend to address the issue of insurer insolvency at all.
39 It is instructive to consider how this problem is responded to by the Law Society, in an argument which was accepted in the Court of Appeal. Both Ryan P. and Finlay Geoghegan J. agreed that there was an inconsistency and potentially severe injustice here but that this consequence could not, as they saw it, override the clear words of clause 4.1.1 in what was described as their natural and ordinary meaning. Again, and respectfully, I disagree that this is the correct approach. This approach takes the ordinary and natural, or perhaps surface, meaning of words as a fixed and immutable point and concludes that if another provision is not compatible with it, then the incompatibility and consequent injustice must simply be accepted. But in my view, the fact that there is such an unavoidable incompatibility and obvious injustice, is a reason to consider if the so called ordinary and natural meaning should indeed be given to the words in their context. The question is what interpretation is to be given to the Agreement as a whole and in its entire context. This is all the more important where the question relates principally to the scope of the agreement. Paying attention to compatibility and apparent logical inconsistency such as this, is central to the approach which culminated in the decision of Investors Compensation Scheme Ltd. v. West Bromwich Building Society. Words are important as a guide and often the surest guide to the agreement made by the parties. But where other guides suggest a different approach to that suggested by the dictionary meaning of the words taken on their own and out of context, then that is a reason to reconsider the interpretation to be given to the contract.
40 Finlay Geoghegan J. offered a slightly different solution. She accepted the argument made by counsel for the Law Society that it would not necessarily follow that the insured who could not obtain indemnity under the policy, and against whom the MIBI enforced a judgment, would be left without a remedy. It was suggested, that if the MIBI sought to enforce the judgment, the insured might then be able to claim from the insurance fund and furthermore that such claim would not be precluded by the terms of s.3(7) of the 1964 Act as inserted by the 2011 Act. Again with respect, it appears to me that there is subtle but important shift of focus here. The question is not whether if the Law Society interpretation is correct, that an insured might be able to mount some plausible argument that a sympathetic court might accept to allow him or her to recover from the insurance fund at least to the extent of 65% of the cost of the claim. The question is whether the parties to the Agreement could ever have been thought to have intended such an unsatisfactory, cumbersome, opaque, and inevitably unjust result. Even if this interpretation of the Agreement and the Act is correct (and it is acknowledged that this is anything but clear-cut), it would mean that the victim would still obtain judgment against the insured. If the MIBI satisfied the judgment, it would then take an assignment of the judgment and could seek to execute it against the insured. The insured may then seek to recover against the insurance fund, but would be limited to 65% of the judgment amount. There would be inevitable delay in having it determined that such a claim could indeed be made during which time the defendant would be at risk of execution, interest would be mounting, as indeed would stress. If, in the event the defendant was unsuccessful in the argument floated by counsel for the MIBI in this case, then there would be no recovery from the insurance fund, and the defendant would face the prospect of being at the loss of further costs incurred in seeking it. If the argument is successful, recovery would still be limited to 65% (or the capped amount) at some future point, which may still leave a very substantial debt. The MIBI for its part would still be able to demand satisfaction of the full 100% of the judgment from the defendant. It is difficult to conceive of any reason why the parties to the MIBI Agreements between 1955 and 2009 could have thought that this would be a desirable situation. But if they had considered this possibility, then it is also difficult to understand why they would have provided for such a cumbersome procedure, when an easier solution would have been to allow the MIBI to recover direct from the insurance fund which could have been provided for in both the Agreement and in the legislation. But finally, if we are to believe that the parties addressed their minds to the situation and intended the outcome that the possible injustice to the insured should be palliated by permitting an indirect claim on the fund by the insured after execution of a judgment assigned by MIBI, it is difficult, if not impossible, to believe that the Agreement would not have said so.
41 It is worth recalling why this sub-issue arose in the present context. It was argued forcefully by the MIBI that the Agreement cannot be given the broad interpretation advanced by the Law Society, (and which undoubtedly accords with the ordinary meaning of the words in clause 4.1.1 taken on their own) because to do so would conflict with clause 3.11, or at least mean that the Agreement would operate in a manifestly unjust way, and that therefore the parties cannot be taken to have intended to agree to such a course unless that was their unmistakable intention. It is no answer to that argument to prefer the plain meaning words of clause 4.1.1, because the words of 3.11 are equally plain if not more so. Nor is it an answer to suggest that the injustice which would follow or would not be so great if the Agreement and Act can be interpreted in a novel way. That is of no assistance to the interpretation issue unless it suggests that the parties considered the position and intended it. That is plainly not the case here. If indirect recovery by the insured from the insurance fund was however intended, then surely that would have been made more explicit. In any event, the equivalent provisions of clause 3.11 permitting assignment of the judgment were in place since 1955, and therefore, on the Law Society’s interpretation at least, the original Agreement intended full recovery against the innocent insured, without any recourse to the insurance fund since of course that was not created until 1964.
42 The only plausible answer the Law Society can give is that it was accepted by Ryan P. namely that it does not matter because the plain words of clause 4.1.1 must prevail. But that means accepting that the parties were clumsy at best in the way in which they expressed themselves in clause 3.11. Once however, this possibility is acknowledged, then the question equally arises why should the Court not consider the possibility that clause 3.11 is accurate and intended, and that clause 4.1.1 should not be given the broad reading contended for? Why in other words not consider the possibility that it is clause 4.1.1 which is clumsy?
43 This leads to a further point of broader application. It is not merely that the broad reading of clause 4.1.1 is admittedly difficult to reconcile with both the preamble and clause 3.11, significant as though those points are. The fact is that there is no other provision of the Agreement which can be said to be consistent with, or otherwise reinforce, the Law Society’s reading of clause 4.1.1 which would have it extend not just to insolvent insurers but indeed to any claim not met within 21 days of judgment. The Agreement contains fairly detailed provisions (which must be strictly complied with) which are plainly directed towards those cases which the MIBI accept are covered by the Agreement: the uninsured/untraced/repudiation cases. The insolvent insurer (or even the more general unmet judgment) cases present different issues of fact; yet no specific provision can be identified that is referable to either of these cases. As already observed some of the provisions are difficult to apply and others produce a palpably unfair result. When we recall that on any view the issues posed by the insolvent insurer present different and distinct questions of both law and policy, and furthermore that on a commercial level involve a very extensive liability, this silence is baffling if the Agreements were intended and understood to have the meaning contended for. It is difficult, if not impossible, to believe that if the MIBI or its constituent members had intended and understood that the Agreement extended to the case of insolvent insurers (or indeed more broadly again to all cases) that specific reference would be made to that, first in the preamble and then in clause 4.1.1, and that specific provisions would be included directed to such cases.
The Memorandum of Association of the MIBI
44 The MIBI also rely to the Memorandum of Association of the MIBI. Object 3.1 of the Memorandum provides that the principal object of the company is to “enter into agreements and make arrangements in compliance with current agreements with the Minister for Transport … responsible for compulsory motor vehicle insurance and connected matters for the compensation of victims of road traffic accidents … involving either uninsured vehicles, stolen vehicles, unidentified drivers, or untraced drivers which are required to be covered by contract of insurance …”. Plainly the objects clause does not extend to providing compensation for the victim of road accidents where the driver is insured with a company which is now insolvent. Accordingly, if the Agreement is interpreted to extend to insolvent insurers, payment would be ultra vires the MIBI.
45 This is responded to by the Law Society with an argument accepted by Hogan J. in the Court of Appeal. It is first pointed out that the MIBI’s interpretation of the Agreement itself goes somewhat further than the Memorandum in that uninsured drivers (and not simply uninsured vehicles) are admittedly covered. Hogan J. acknowledged however that there was a strong argument that the Memorandum did not extend to cover the liability which the Law Society contended was part of the Agreement. However he considered the most straight forward answer to this was that no road user injured and who sought recovery, would be “actually aware” of this lack of vires on the part of the MIBI, and therefore any such lack of vires could not be pleaded by the MIBI so as to exclude entitlements otherwise conferred by the 2009 Agreement on such third parties pursuant to s.8(1) of the Companies Act 1963, which for the purposes of the case was considered to be the applicable provision.
46 Again, this is however a subtle shifting of gears which presents an apparent response to the argument but in fact addresses a different question, which was not posed. In my view at least, the question is not whether the MIBI could raise a plea of ultra vires, but rather what light this admitted interpretation of the Memorandum of Association throws upon the Agreement itself. The Memorandum of Association of the company is particularly important in this case. It should be recalled, that the original Agreement of the 10th March, 1955, was between named insurers and the Minister for Local Government under which they agreed to form the company. The MIBI was therefore incorporated on the 27th July, 1955, and the Agreement entered into thereafter between the Minister for Local Government and the newly formed MIBI. The incorporation of the company was therefore a key provision in the Agreement between the Minister and the insurance companies and furthermore was entered into during the same time period, and in the same legal context, as the Agreement of the 10th March, 1955, and the subsequent Agreement of the 30th November, 1955. Its terms throw substantial light on the scope of the Agreement as understood at the time. It is significant that the Minister, who was to approve the formation of the company, raised no objection to this formulation of the objects clause. There could be no reason why the companies incorporating the MIBI would voluntarily seek a mismatch between the scope of objects clause and the scope of the Agreement which the company was incorporated to enter into. The only possible conclusion from this sequence of events is that the insurers establishing the MIBI did not advert to the possibility of the insolvency of an insurer and did not consider that it was the function of the MIBI to make payments in relation to it. This is a very powerful indicator of the scope of the Agreement as contemplated by the parties at the time. It is no answer to this to argue that if the Agreement is construed more broadly, then the MIBI would not be entitled to raise the doctrine of ultra vires as a defence to the claim.
The position taken by the Minister
47 The MIBI also rely on the position adopted by the other party to the Agreement, the Minister for Transport. The MIBI has exhibited a letter of the 10th September, 2014, to the MIBI from a principal officer in the Department, which was also copied to the relevant equivalent officer in the Department of Finance. It states as follows:
‘“The Department has considered the contents of your letter and sought the advice of the Attorney General in this regard.
It is the Department’s position that there is no legal obligation, under the MIBI Agreement 2009, on the MIBI to satisfy judgements or claims made against customers of Setanta Insurance in liquidation when they have an existing approved policy of insurance at the time of the accident which has not been declared void or cancelled up to May 2014. Furthermore the Department is of the view that the Insurance Compensation Fund, established under the Insurance Act 1964 as amended, is the express statutory mechanism for providing compensation for claimants against insurers, both foreign and domestic, in liquidation. This would include any claims made by injured victims against Setanta who have not had their judgments or claims satisfied by Setanta.”
48 The MIBI rely on this as reflecting the views of the other party to the Agreement and as coinciding with the view maintained by the MIBI that claims against defendants insured who have become insolvent are not captured by the Agreement. The Law Society argued, and indeed the Court of Appeal appears to have accepted, that the letter was irrelevant since it merely recorded legal advice, which moreover, in the light of the decision of the Court of Appeal, was erroneous. I do not think however that it is sufficient to treat the letter in this fashion. It is certainly clear that advice was obtained prior to its completion and it so states. Furthermore, since it distinguishes carefully between claimants in respect of accidents which occurred prior to cancellation of the policy in May 2014, and those thereafter, it makes a careful distinction which may reflect advice. But the letter does not purport to be merely, or at all, the recording of legal advice. Rather it states the “position” of the Department. Furthermore, it is written in the context of a dispute which by then had arisen and which had been the subject of public controversy not least in circumstances where the matter had been agitated in the Oireachtas, and before Oireachtas sub-committees, at which the principal officer in the Department of Finance copied with the letter had given evidence. It is a serious matter for the Department to commit itself in this way in general, but more so when done specifically in the context of the public dispute which had arisen. The Law Society do point out that the Department did not participate in the proceedings although having been served, and that no affidavit was sworn by an official setting out the background facts. This is true, but I do not think that the Court can assume as the Law Society invited it to do so, that the letter is misleading, and that although the Department knew the Agreement covered insolvent insurers, it has nevertheless adopted a contrary “position” in the knowledge that the letter would be used in court. It would indeed be a serious thing if the position adopted in public by the Department was intentionally misleading. Such a serious conclusion could however only be arrived at after a full oral hearing and cross-examination which did not take place here and which the Law Society did not seek. I consider that the Court must therefore take the letter as proffered as a representation of the position of the Department and not merely legal advice with the qualification that it has not been the subject of testing in court as might have occurred had there been an oral hearing. However, taking it in this way, the letter offers further important support for the interpretation advanced by the MIBI. If this is accepted, even with some qualifications, then it appears that the MIBI and the Department of Transport shared a view as to the scope of the Agreement. If so, it becomes difficult to see how it can be said that the Agreement can be interpreted more broadly than the parties to the Agreement itself contend.
The Act of 1964
49 Both sides rely on the provisions of this legislation. Clearly, the Setanta liquidation claims come within the scope of the 1964 Act as subsequently amended, because they are claims made in respect of an insurer now insolvent. However the Law Society pointed to provisions of the Act. First, s.3(2) of the 1964 Act as inserted by s.4 of the 2011 Act, provides, rather curiously, that the High Court should order payment out of the insurance fund “only if it appears to the High Court that it is unlikely that the claim can be met otherwise than from the Fund.” This indeed was the provision relied upon by the Law Society to persuade the accountant of the High Court to seek directions rather than make payments from the Insurance Fund to those with claims against a driver insured by Setanta.
50 Furthermore, s.3(4) of the 1964 Act which was re-enacted in identical terms by s.4 of the Insurance (Amendment) Act of 2011 and became section 3(7). It makes specific reference to the Motor Insurers’ Bureau of Ireland and provides:
“Where in respect of a sum due under a policy, a payment equal to the whole of the sum is made by the Motor Insurers’ Bureau of Ireland, a payment shall not be made out of the Fund under this section in respect of the sum, and where, in respect of such a sum, a payment equal to part of the sum is made by that Bureau, a payment out of the Fund in respect of the sum shall not exceed the amount of the sum less the amount of the payment by that Bureau.”
51 Section 3(2) of the 1964 Act (as amended) is important in this case since it is the ostensible basis upon which these proceedings are mounted. However, if payment is refused in reliance on s.3(2), that by itself does not ensure that payment will be made by any other source, and specifically the MIBI. That raises issues as to the resolution of these proceedings, and the appropriateness of them for these complex matters, but it does not add much to the question of interpretation. Section 3(2) is in general terms, and cannot itself be read as a statutory endorsement of the possibility of payment by the MIBI.
52 Section 3(4) of the 1964 Act (as re-enacted as s.3(7) under the 2011 Act) is however a different matter. It specifically refers to the MIBI and contemplates the possibility that there may be payment. Presumably the reference to part payment by the MIBI is a reference to the limitations on recovery in respect of property damage which, although adjusted, have remained a part of the regime. Counsel for the Law Society argues with considerable force, that given its context, this is a clear endorsement of the possibility that the MIBI will have a liability in the case of insolvency, since it is only in that context that the possibility of a payment out of the insurance fund could arise. Thus, he says, this is only consistent with the MIBI being liable in such a circumstance.
53 The MIBI respond in two different ways— neither of which is fully convincing. First, it is suggested that there is some residual area where it is possible that there is a circumstance where the section may have application. Thus, in the so called “insurer concern” cases, an individual insurer has a responsibility and of course may become insolvent. However, it is not clear that in such a case it can be said that the MIBI makes a payment which is contemplated by s.3(4). Alternatively it said that s.3(4) is clearly drafted in the light of the issue which arose in respect of the insolvency of the Equitable Insurance company, to which greater reference will be made below, where the MIBI certainly made some payments. If however, this was the reason for s.3(4) it does not readily explain why it would be re-enacted as s.3(7) in 2011. Again, the MIBI suggest there is a tendency to draft by accumulation, and it is rare for provisions in legislation to be dropped. This is true but nevertheless, neither of these explanations are wholly convincing.
54 This is an important point, and one which favours the Law Society’s interpretation. However, it is not a point which determines the case. The provisions of s.3(4) contemplate but do not require payment by the MIBI in such circumstances. The central feature of this case is that there was a degree of confusion and ambiguity as to the function of the MIBI in insolvency claims. Therefore the Act can be read that if, for whatever reason, a payment is made by the MIBI, then the insurance fund is to that extent, absolved. But a different point can also be made in this regard. The interpretation advanced by the Law Society assumes that motor claims against insolvent insurers come within the terms of the MIBI. Thus they should be excluded as a matter of principle from the insurance fund. If the Law Society’s interpretation is correct, one might expect therefore that claims made in respect of road traffic accidents involving vehicles and driving which is the subject of the compulsory insurance provisions of the Road Traffic Act, would be simply excluded from the scope of the legislation in 1964, and certainly when re-enacted in 1983 and again in 2011. Two other aspects of the regime under the 1964 Act also support, at least inferentially, the position of the MIBI. First, if the interpretation of the Law Society is correct, then motor insurers, who are the subject of calls under the MIBI Agreement, should not be required to contribute through the levy to the insurance fund. Put another way, motor policies, should not be the subject of a levy for the insurance fund, or at least at the same rate, since on the Law Society’s argument, the insurance fund does not deal with motor claims. If accordingly, the motor insurers considered that MIBI was to be the source of compensation of plaintiffs’ claims against drivers whose insurer becomes insolvent, then it seems likely that at some stage they would have raised the issue in an attempt to reduce, if not remove, their obligation to contribute to the insurance fund.
55 Furthermore, the insurance fund has dealt with very substantial claims made in respect of insolvent insurers who provided motor insurance. The PMPA failed in 1983, ICI (later Icarom) in 1985, and more recently Quinn Insurance Ltd. went into administration. Each of these companies had substantial motor business. As of the 1st April, 2015, the principal officer in the Department of Finance stated that the amount outstanding owed by those businesses were then €139 million, €164 million and €1.158 billion, respectively. Given the structure of the insurance fund, these monies were met by monies advanced from the public purse which are gradually recouped from the 2% levy over time. It should be said that in each of these cases, the mechanism adopted was to make use of the administration procedure which meant that the companies although insolvent, were not placed in liquidation but rather were maintained as a going concern. There was therefore no question of any limitation on the amount to be paid in respect of claims. Nevertheless the fact remains that if the Law Society’s contention is correct, then the accountant and the High Court were wrong to make any payments in respect of the motor claims of those companies since such claims properly fell to the MIBI to satisfy. It is not a sufficient answer to suggest, as I understand the Law Society to do, that this is irrelevant because there was no practical difference for claimants, since the administration process meant that the claims were paid in full, albeit through the insurance fund. From the perspective of claimants that is so and provides some, although not a complete explanation, why no such claims were not made to the MIBI. But it provides no satisfactory explanation whatsoever from the perspective of the insurance fund and the Accountant whose statutory obligation it was to ensure that only claims were paid which properly fell on the insurance fund.
56 Three further matters are relied upon by the Law Society. First, the Equitable Insurance Company collapsed in 1964. The problems created by this event appear to have been the genesis for the introduction of the 1964 Act and the creation of the Insurance Compensation Fund. In the course of its creation, a memorandum to Government in April 1964, records that the Motor Insurers’ Bureau “will in accordance with the terms of the agreement with the Minister for Local Government meet certain liabilities under motor policies to the extent of €140,000 leaving a balance of €210,000 approximately”. It is also recorded that the Minister had requested the MIBI to accept liability for all claims under equitable motor policies whether or not they were covered by the Agreement with the Minister for Local Government but that the request was turned down. The Law Society’s suggestion is that this is clear evidence that as of 1964 the MIBI Agreement was considered to cover the risk of an insurer’s insolvency. Against this the MIBI point out that this occurred in a different legal context, that it is not clear that on the basis upon which any money was paid by the MIBI in respect of the Equitable Insurance Company, and finally, they point to the provisions of the MIBI’s council minutes of the 26th September, 1994, which recorded that the Bureau had succeeded in recovering more than €94,000 in respect of the Equitable Insurance Company (in liquidation) “which is the amount which was discharged by the Bureau on behalf of Equitable in the past” and that this was now the end of the Bureau’s involvement in the matter. The MIBI maintain therefore, that any payment made in 1964 may have been on an ex gratia basis, and predated the establishment of the insurance fund, and cannot therefore be considered a decisive guide to the interpretation of the Agreement after 1964, where, as already set out, it appears that large insolvencies of companies with motor policies were dealt with under the insurance fund.
57 Finally, the Law Society point to the provisions of the accounts of the MIBI which, for 2012, contain a note which sets out a contingent liability that:
“In the event of insolvency of any of its members, the Bureau is required, under its agreement with the Minister for Transport, to pay claims, to the extent that its insolvent member is unable to do so.”
Mr. Casey, the Chief Executive of the MIBI, who swore an affidavit on its behalf in these proceedings, has acknowledged that the accounts contain this provision but maintains that it is an error and that no provision was made in the accounts for any such contingent liability. The Law Society argue that a statement in the accounts adopted by the directors of the company is a solemn matter and not likely to be disregarded. That is so, but human error is not impossible. There is scope for confusion as to the liability of MIBI members to contribute inter se to MIBI liability in the case of the insolvency of a member of the MIBI, and the question of whether the MIBI’s liability extends to insolvent insurers. In any event, given the fact that this case extends over a 60 year period, it is misguided to assume a single corporate entity with a single shared view of this matter. The fact is that during this time there would have been considerable turnover of individuals both in the Department and the MIBI and its constituent insurers. Accordingly, it cannot simply be a case of finding what some people have said at different stages and attributing that view to the body in general throughout its life. Whereas here, a provision is ambiguous, it is to be expected that some persons involved on either side over the period of 60 years will hold a different view and may express them. However, the question, if relevant is what the general view of those involved with the company or the Department was particularly at the time of, and as expressed in, the Agreements.
58 While undoubtedly this is a finely balanced case, in my view it must be resolved in favour of the interpretation advanced by the MIBI. It is clear that the major factor in the decisions of the High Court and Court of Appeal was the weight given to what was described as the ordinary and natural meaning of the words in clause 4.1.1. However, in my view when the clause is put in the context of the Agreement as a whole and set against the background of what was known between 1955 and 2009, it is possible to read those words as the MIBI suggest, as being applicable only to a limited class of claims. Once the scope of the Agreement is established, then the generality of the language used in clause 4.1.1 poses no difficulty. For the most part, the Department and the MIBI had a shared understanding of the scope of the Agreement and the broad language used, was employed in that context and subject to that limitation. The information in the Memorandum for Government in relation to Equitable Insurance is not unequivocal, and, at any event, relates to a period before the enactment of the 1964 Act.
United Kingdom Authorities
59 The Law Society however also place reliance on observations in certain UK authorities. I agree that particularly in an area as obscure as this, any source that shines light on the matter is welcome. Furthermore, it seems probable that both structure and content of the MIBI Agreement was closely modelled on the UK agreement. Perhaps the most relevant authority is the observation of Diplock L.J. (as he then was) in Gurtner v. Circuit [1968] 2 Q.B. 587 at p.598. The first two paragraphs of the judgment are particularly useful:
“This appeal illustrates once again the legal anomalies which result from the method adopted by the Minister of Transport in 1946 to fill a gap in the protection of third parties injured by negligent driving of motor vehicles provided by the Road Traffic Acts of 1930 and 1934.
Under those Acts although insurance against third party risk was made compulsory and insurers made directly liable to satisfy judgments against their assured, an injured person, although he had recovered judgment against a negligent defendant, could whistle for his money if (a) the defendant was not insured at the time of the accident or (b) his policy of insurance was avoided in the circumstances specified in section 10(3) of the Act of 1934 for non-disclosure or misrepresentation or (c) his insurer too was insolvent. To fill this gap the insurers transacting compulsory motor vehicle insurance business in Great Britain, acting in agreement with the Minister of Transport, formed a company, the Motor Insurers’ Bureau, to assume liability to satisfy judgments of these three kinds. But instead of amending the legislation so as to impose upon the Motor Insurers’ Bureau a statutory liability to the unsatisfied judgment creditor as had been done by the Road Traffic Act, 1934, in respect of the liability of insurers to satisfy judgments against defendants covered by a valid policy of insurance, the matter was dealt with by an agreement of June 17, 1946 between the Minister of Transport and the Motor Insurers’ Bureau.” [Emphasis added]
60 Understandably the Law Society place heavy reliance on this observation, and the circumstance in which the observation has been repeated in subsequent cases. However, it is an observation on a matter which was not the subject of the argument in the case. Gurtner v. Circuit is an important decision as to the circumstances in which a non-party may seek to be joined as a party to litigation. In that UK case, the MIB had sought to be joined as a defendant to contest a claim in circumstances where the defendant was to be treated as uninsured. The case did not raise the specific question as to whether the agreement extended to the insolvent insurer situation. In Morgans v. Launchbury [1973] A.C. 127, Lord Pearson (again obiter) appears to have described as “not effectively insured” persons who had “taken their policies from an insolvent insurance company”. These judgments predate the introduction of the Policy Holders Protection Act of 1975 and 1977, (now replaced by the Financial Services and Markets Act 2000) which introduced a scheme of compensation in respect of insolvent insurers akin to the Insurance Act of 1964. Subsequently, the UK MIB agreement was amended to exclude cases in which a claimant had received compensation from “the Policy Holders Protection Board under the Policy Holders Protection Act 1975”. Accordingly while the matter has been referred to in passing in subsequent cases, and indeed in one academic article, the matter has not been the subject of a decided case in which the issue was clearly raised. Both sides rely on these developments for their own purposes. The MIBI argue that the UK position now reflects the logic of the position contended for by them in that insolvent insurer claims are dealt with as part of the regime set up to deal with the problems created by insolvencies among insurers, rather than under the Motor Insurers’ Bureau type agreement. On the other hand, the Law Society argue with some force, that this result was only achieved by specific amendments which accordingly implies that without such language, the Agreements would extend to the insolvent insurer situation. In my view, the balance of these arguments favours the Law Society. However, that only goes so far. The UK has, as it were, put features on the faces and coloured them in in relief, so that there can no longer be any argument that the picture is a vase. In Ireland we face a situation where the picture is free from that type of clear statutory and contractual adjustment. In that context, I agree that it is significant that Diplock L.J. considered in 1968 that the same language in the United Kingdom was broad enough to cover the insolvent insurer situation, but since the issue was not argued and did not arise in the case, the observation, preceding as it does the 1975 legislation, has less force than would be the case if it had been the subject of clear argument and reasoned decision.
61 Gurtner v. Circuit is also relevant to another aspect of the case which was touched on earlier and which relates to the manner in which these proceedings have been designed. It confirms that the legal analysis of the MIB agreement is one made between two parties conferring a benefit on third party claimants. Unless one of the exceptions to the privity rule applies, such an agreement is not enforceable at the suit of any such third party (at least without the acquiescence of the party sued) and as both Diplock L.J. and Salmon L.J. observed, the ultimate method and enforcement of the Agreement in the case of any dispute would be for the Minister to sue the MIBI for enforcement of the terms of the Agreement. This is reinforced by the fact that the 2009 version of the Agreement contains a provision in relation to which disputes are resolved finally, by the decision of the Minister. If both the Minister and the MIBI are agreed on the extent to which the Agreement covers claims, then the Minister would not sue, and could not, at least without some elaborate and relatively novel legal argument, be forced to do so.
62 It is of course to be expected, that in the circumstances of this case the Minister would accept the determination of the Court that the proceedings cover the insolvent insurer case if that was the decision of the Court. But this cannot be guaranteed, and in any event only leads to a further problem, which clearly troubled Finlay Geoghegan J. in the Court of Appeal. These proceedings do not, and any proceedings, could not force the MIBI to satisfy any individual award. Nor could proceedings provide a blanket obligation on the MIBI to satisfy awards where the insurer was insolvent. That is because compliance with the MIBI is a precondition to liability in any case, whether or not the insurer is insolvent. These proceedings seek to achieve a result indirectly and negatively, by preventing the accountant of the High Court from making payment from the insurance fund to parties otherwise entitled to claim under it, on the basis that it appears that another source of compensation is available, in this case, a possible claim against the MIBI. An order effectively restraining the accountant from payment does not compel payment by the MIBI. If the MIBI did not satisfy the judgment, then the claimant would have to revert to the insurance fund, in which case the attempt to obtain payment from the MIBI would have been a costly and pointless detour. This is clearly less than satisfactorily, but is the effect of the fact that all parties and all information are not before the Court.
63 This leads to a final consideration. It is unrealistic not to recognise that at the forefront of this case is the fact that these complex arguments are only necessary because there is a substantial difference between the available recovery under the insurance fund (limited to 65% or €830,000), and from the MIBI which recovery is close to a full indemnity against judgments obtained. It is indeed an interesting thought experiment to consider how the arguments might differ if the situation was reversed and the insurance fund offered the prospect of 100% recovery and the MIBI only a substantial fraction. However, it is not possible to be unaware of the fact that if the Agreement is interpreted as the MIBI suggests it should be, victims of road traffic accidents will face a significant limit on the amount that they can recover. The Law Society makes this point very effectively in the conclusion of its submission by arguing that a finding that liability lay with the insurance fund, and not the MIBI “would be to the benefit of insurers at the expense of victims”.
64 The reality is however that the Court is not asked to determine whether a victim should be paid in full, or almost in full (from the MIBI), or in part (from the insurance fund). If that were the question, it would be easily answered. It is asked to give a determination on the interpretation of an agreement in accordance with principles applicable to every contract. Whatever interpretation is given, it will almost certainly lead to further developments, either the possible winding up of the MIBI, or the renegotiation of the Agreement on the one hand, because even the Law Society appears to accept, that the Agreement as interpreted, lacks any commercial justification or logic from the insurers point of view. On the other hand, if the claims are to be met under the insurance fund, then it is inevitable that there would be pressure for the amendment of the 1964 Act scheme. The logic of limiting payments made in respect of insolvent insurers, makes some sense in the context of claims by policy holders. It may be thought that there should be some moral hazard, as it were, for the decision to place insurance with a new insurer offering perhaps suspiciously low premiums. Otherwise there would be no incentive to obtain insurance from more cautious businesses, since any policy holder would know that there was a 100% backstop in the shape of the insurance fund. However, whatever logic there exists in this regard, the same logic cannot, it seems, apply to victims who have claims against a policy holder with such a company. A victim does not choose the party with whom he or she collides, and still less his or her insurer. It is perhaps instructive that when the ICI, the PMPA, and Quinn Insurance Ltd. all collapsed, the authorities adopted the option of administration to allow the companies to continue in business with the effect that all claims were met. If accordingly, this Court were to determine that on its true construction such claims do not fall under the MIBI and must therefore be met by the insurance fund, then there is a strong and probably unanswerable case in equity for the amendment of the scheme to permit recovery of such claims. If indeed, the position were maintained that victims are limited to 65% of the recovery, the constitutional validity of the application of any such limit to third party claimants would clearly arise and have to be addressed.
65 However, the issue for this case and which the Court must resolve, is the difficult one of the interpretation to be given to an agreement which itself is ambiguous. This is like a freeform jigsaw where it is possible to arrange the pieces in at least two different patterns, each of which has some attractive elements, but where some pieces are difficult to fit into the overall pattern. It is useful therefore to stand back and consider the overall picture, and the competing arguments as to what occurred here.
66 I do not think it is possible to arrive at a conclusion that the Agreement had a meaning that neither of the parties intended. Nor in these circumstances is it necessary to consider the possibility that the Minister for Transport believed and intended that the Agreement would cover insolvent insurers but the MIBI did not. The issue in this case appears to resolve itself therefore to a question as to what the parties collectively intended. On the Law Society’s case, the parties intended to cover the case of an insolvent insurer (although perhaps not appreciating the significance of this liability), and the MIBI has now sought to resile from that position when faced with the scope of the liability. Furthermore, it is contended that the Department has facilitated this approach by taking a public stance that at least suggests it agrees with the MIBI’s interpretation, and certainly does not contest it. On this approach, the language of clause 4.1.1 is deliberate and the reference in the accounts represents the true position of the MIBI (and necessarily the Department). This interpretation would however raise troubling questions, particularly since it reflects adversely on the individuals and institutions involved, in circumstances where there has not been a hearing with full discovery, oral evidence and cross-examination. Ultimately however, I consider the argument put forward by the MIBI to be a more plausible approach. On this version, the parties were in agreement as to the scope of what was to be covered by the Agreement and in its various iterations, namely the uninsured/untraced/repudiated cases. In that context they used words of general application, which when viewed, particularly out of their context, certainly are capable of much broader application. However, given the fact that liability for claims against drivers whose insurance company has become insolvent raises different issues of law, procedure and fact, and moreover involves significantly different risk and exposure, it is difficult to accept that had such an extension of liability been intended on each occasion on which the Agreement was made or renewed or amended, that detailed provisions would not have been included for the different factual and legal scenarios, and that explicit provision would be made for the interaction between satisfaction by the MIBI and recovery from the insurance fund, and indeed the possibility of recovery of portion of the amount from the liquidator of the insolvent insurer. In simple terms, it is difficult to accept that the parties intended to cover such a case, and yet did not address themselves to the commercial and legal issues involved. In those circumstances, I have come to the conclusion that the Agreement must be interpreted as applying only to the limited class of cases as asserted by the MIBI and does not extend generally either to cases where an insurer is insolvent, or indeed to all cases in which a claim has not been satisfied within 21 days. Accordingly I would allow the appeal, and set aside the declaration made in the Court of Appeal.
The Law Society of Ireland v The Motor Insurers’ Bureau of Ireland
45/2016 (WLIE 1)
Supreme Court
25 May 2017
unreported
[2017] IESC 31/1
Mr. Justice Clarke
May 25, 2017
In the Matter of an application by the Accountant of the Courts of Justice pursuant to the Insurance Act, 1964 (as amended by the Insurance (Amendment) Act, 2011
JUDGMENT
1. Introduction
1.1 One the perennial issues which leads to complex and innovative litigation is the age old question of identifying a potential defendant who not only may have a legal liability to pay damages but will also be in a position to actually discharge any damages awarded. In the terminology of those involved in litigation this involves identifying a defendant who will be a “mark”. It hardly needs to be said that it would, in the vast majority of cases, amount to little more than a pyrrhic victory if one were to succeed in establishing liability and achieve an award of significant damages but, at the end of the day, the person against whom that award is made was not in a position to pay up. Many developments in the law of liability, particularly but not exclusively in tort, have been driven by plaintiffs seeking to expand the category of those who may be found liable because the person or body which might be considered to be the natural or primary target of litigation would be unable to pay any damages awarded.
1.2 Such considerations have doubtless informed attempts going back over many years to put in place measures designed to minimise the risk that persons injured in motor accidents, who can establish liability, might be left without a practical remedy in the form of an order for damages which is likely to be met. The system for the compensation of those injured in motor accidents through the fault of others remains based on the tort of negligence. The law of tort itself of course requires the establishment of fault. However, in the absence of any specific mechanism to ensure payment of any damages awarded, the chances of a plaintiff actually recovering damages would be wholly dependent on whether those persons against whom fault could be established (whether directly or vicariously) were marks. If the system were left entirely to its own devices plaintiffs would succeed in actually achieving compensation (or fail so to do) wholly dependent on the financial standing of those against whom awards could be made. Indeed, it does have to be said that there are certain areas of liability where that somewhat random element continues to apply. While many, indeed most, employers either have a sufficient level of assets to cover damages claims or are insured, an employee who suffers a workplace injury due to negligence attributable to their employer is dependent on either the employer concerned being in a position to meet any award or there being an effective policy of insurance in place.
1.3 However, there clearly has been a policy view going back very many years that, at least in the most general of terms, persons who are injured through the fault of others in motor accidents should not be left on the hazard of having to depend on identifying a defendant who is a mark in order to be able to recover damages in practise. The system of compulsory insurance for those driving motor vehicles is, of course, directed to that end. Where that system works, plaintiffs do not have to concern themselves with whether the defendant whose negligence caused their injuries is a mark but rather can look to the defendant’s insurer. But without further intervention such a system would have left some, being those who were unlucky enough to be injured by drivers who either were not insured or whose insurance company had some legitimate basis for declining liability, without practical recourse. It is in that context that the position of the respondent/appellant (“MIBI”) comes into play. While it will be necessary briefly to outline the history of the MIBI in due course and while the precise scope of its obligations lie at the heart of the issues which arise on this appeal, it can, at least in very general terms, be said that the purpose of the MIBI from its inception has been designed to at least partly fill the gap in cases where persons are injured due to the negligence of drivers who are not insured.
1.4 But a second possible difficulty also potentially arises. Insurance is only as good as the solvency of the insurance company which provides cover. Plaintiffs, dependent on insurance for the recovery of damages, are, therefore, dependent on the ability of the relevant insurance company to pay. It will be necessary in that context to refer in due course to certain statutory measures which have been put in place to provide a compensation fund (the Insurance Compensation Fund – “the Fund”) designed to cover, at least in part, the liabilities of insolvent insurance companies.
1.5 This appeal is concerned with the potential liability of one or other of the Fund or the MIBI in respect of the compensation of parties injured in motor accidents due to the negligence of drivers who had policies of insurance with Setanta Insurance company (“Setanta”) in circumstances where that company is insolvent.
1.6 In substance the issue is a very net one. Are claims arising in such circumstances covered by the MIBI agreement, in which case the compensation of such injured parties will be a matter for the insurance industry in accordance with the terms of that agreement? Alternatively do such claims fall outside the scope of the MIBI agreement, in which case injured parties must rely on the Fund to the extent that it is obliged to make up some of the damages to which they might be entitled. The Fund can be called upon only where there is no other source of payment so that it would have no liability if the MIBI is obliged to compensate.
1.7 It should be emphasised that the question really turns on the proper interpretation of the agreements governing the obligations of the MIBI considered in the context of the legislation establishing and governing the Fund. This case is not about whether it would be better or more appropriate that the burden of meeting damages properly owed to persons injured by the negligence of drivers whose insurance company became insolvent should fall on the Fund or the MIBI. That is a question of policy and one for the agreement of the parties. Rather the issue concerns the extent, if any, to which the insurance companies who subscribed to the MIBI and through it to the MIBI agreement have, in substance, contracted to meet such claims. If the relevant agreements were clear in either including or excluding liability in such cases then that would be that. The problem is that the agreements are, on any view, unclear and it follows that it is necessary for the courts to do the best they can in construing the agreements and any other relevant materials in order to answer the question raised.
1.8 In any event the High Court (Kearns P.), by order dated the 27th April, 2015, directed that this claim be maintained by the claimant/respondent (“the Law Society”) as representative of the interests of potential plaintiffs. The circumstances leading to that order will be addressed shortly. On the substantive issue being heard, the High Court (Hedigan J.) found in favour of the Law Society and held that the MIBI was obliged to compensate. (See Law Society v. MIBI [2015] IEHC 564). The Court of Appeal dismissed an appeal by the MIBI against that order (see Law Society v Motor Insurers Bureau of Ireland [2016] IECA 60).
1.9 This Court, (see Law Society v. MIBI [[2016] IESCDET 57), gave leave to appeal on the following basis:-
“… subject to the refinement or alteration of what follows at the case management conference, the Court will allow an appeal on the following points:
Whether the MIBI Agreement may properly be construed so as to impose liability or potential liability on insurance underwriters which are party to the MIBI Agreement to pay out in respect of claims against persons who were insured with Setanta, a Maltese registered insurance company, at the time of its entering into liquidation in April 2014.
The correct principles to be applied in construing the MIBI agreement, whether it be a private agreement or an administrative arrangement between Government and the motor insurance industry, with particular reference to the influence of statutory provisions on the proper interpretation of the language thereof
If the MIBI is so liable, how any such liability or potential liability on the part of the MIBI impacts upon the power of the High Court to approve payments under section 3 of the Insurance Act 1964 (as inserted by section 4 of the Insurance (Amendment) Act 2011) authorising payments out of the Insurance Compensation Fund “only if it appears to the High Court that it is unlikely that the claims can be met otherwise than from the Fund.”
Against that general background it is necessary to turn to a brief account of the procedural history.
2. Procedural History
2.1 These proceedings ultimately arose from a decision by Setanta to enter into a creditor’s voluntary winding up in April 2014, which event was preceded by concerns being voiced by the Central Bank from September 2013. The Accountant of the Courts of Justice, exercising statutory duties under s. 26 of the Courts Officers Act 1926 in relation to whether relevant claims could be met otherwise than from the Fund, issued proceedings (Accountant of the Courts of Justice and the Insurance Act, 1964 – Record No. 2015/85) on the 13th April, 2015, in which para. 1 of the relief claimed sought the determination of the following questions:-
• “(a) Whether MIBI has a liability or potential liability to pay out in respect of claims against persons who were insured with Setanta, a Maltese registered insurance company, at the time of its entering into liquidation in April 2014.
• (b) If so, how any such liability or potential liability on the part of the MIBI impacts upon the power of the High Court to approve payments under section 3 of the Insurance Act 1964 (the “Principal Act”) (as inserted by section 4 of the Insurance (Amendment) Act 2011 (the “2011 Act”)) authorising payment out of the Fund “only if it appears to the High Court that it is unlikely that the claim can be met otherwise than from the Fund.”
2.2 On the 27th of April, 2015 Kearns P. ordered that the Law Society and the MIBI be added as claimant and respondent respectively to the proceedings. Kearns P. further directed that the question of who is liable for claims against Setanta policy holders be considered with two questions being directed to be tried being whether MIBI had any liability and, if so, how such liability impacted on the power to make payments out of the Insurance Compensation Fund under s.3 of the Insurance Act 1964.
2.3 Thereafter, the hearing of those issues came before Hedigan J. in the High Court. As noted earlier the High Court found in favour of the Law Society, an appeal was brought by MIBI to the Court of Appeal but was dismissed and leave to appeal to this Court was successfully sought.
3. The MIBI Agreements
3.1 The genesis of the MIBI agreements came in the form of terms concluded between those insurers carrying on motor insurance business in Ireland and the relevant minister (I will use the term “the Minister” to refer to the various titles which the minister responsible for insurance has held over the period since 1955). That initial agreement (“the original agreement”) contemplated the establishment of what became the MIBI and set out the commitment of the relevant insurers to procure that the MIBI would enter into an agreement with the Minister providing a mechanism to ensure the discharge of certain judgments against uninsured drivers. In furtherance of the original agreement the MIBI was established in 1955 as a company limited by guarantee. Its objective was stated to be to compensate victims of uninsured motorists but its liability extended only to circumstances where compulsory insurance was required. As contemplated by the arrangement between the Minister and the motor insurance industry, the terms of the scheme were set out in the form of a contractual agreement between the MIBI and the Minister (“the 1955 Agreement”). This agreement was amended several times with each subsequent agreement determining or terminating the previous one.
3.2 Under the 1955 Agreement, the MIBI essentially agreed to pay the amount of a judgment against an uninsured driver if the judgment was not otherwise satisfied within 28 days. This obligation extended only to judgments in respect of personal injury or death caused by the driving of the vehicle in circumstances within the scope of s. 56 of the Road Traffic Act 1933. (See Clause 1 and Note 2 to the 1955 Agreement). The Agreement also provided for the possibility of ex gratia payments which could be made in respect of serious injuries or death caused by untraced motorists, (see Note 8 to the 1955 Agreement). The 1955 Agreement did not apply to damage to property
3.3 A subsequent agreement was made in 1964 which reflected the extension of compulsory insurance requirements arising from the Road Traffic Act, 1961 (“the 1961 Act”).Section 56 of the 1961 Act extended the compulsory insurance requirement to “use”, as opposed to simply “driving” of a vehicle.. The Notes to the 1964 Agreement state that the Agreement would “with certain exceptions extend to persons travelling in the vehicle” or passengers. (See the MIBI Agreements and The Law, by Lyons and Noctor, 2nd edition, par 1.12) The MIBI was not liable to satisfy judgments in respect of persons travelling in a vehicle where the vehicle was being used without the owner’s consent.(Clause 3, par 1 and Note 2). However, the MIBI could make ex gratia payments if it could be shown that the relevant passenger was not aware that the vehicle was being used without the owner’s consent. (See Clause 4 and Note 2). Similarly, the MIB was not liable to compensate persons who were in or on a vehicle in circumstances where they knew or ought to have known that there was no policy in place in respect of the “use” of the relevant vehicle. (See Clause 3, par 2). In addition Clause 4 of the 1964 Agreement, Note 8 allowed for ex gratia payments in relation to untraced drivers on the same terms as set out in the 1955 Agreement.
3.4 In 1988 a further agreement was made which implemented the Second Council Directive on Motor Insurance of 20th December 1983, on the approximation of the laws of Member States relating to insurance against civil liability in respect of the use of motor vehicles (Directive 1984/5/EEC) and extended liability to damage to property caused by uninsured motorists (reflected in Clause 4 of the 1988 Agreement). In addition clause 6 extended liability for injury or death – but not damage to property – in respect of untraced drivers. Under clause 5, certain passenger claims were excluded in respect of a stolen vehicle (CL. 5.1), where a person knew or ought to have known that a vehicle was uninsured (Cl. 5.2) or where an accident took place between two uninsured vehicles.
3.5 A 2004 Agreement introduced procedural changes for making claims and significantly, in clause 13, the Fund is referred to as the “… Fund of Last Resort.” However, this clause was not repeated in the subsequent Agreement; nor was it to be found in previous agreements.
3.6 A 2009 Agreement implemented the judgment of the CJEU in Commission v Ireland (Case C-211/07) such that only passengers who “knew” – as opposed to “ought to have known” – that they were in an uninsured vehicle, were excluded from being compensated by MIBI. In addition the agreement did not provide for an exclusion in respect of a collision involving two uninsured vehicles, (as had been the case in cl. 5.3 of the 1988 Agreement) as this was also held contrary to the 2nd EU Motor Directive (84/5/EEC). Clause 7.1. also introduced compensation for damage to property caused by untraced drivers but only where damages were also obtained for personal injuries.
3.7 It is anticipated that the MIBI Agreement(s) may have to be further amended in light of the recent decision of the CJEU in Damijan Vnuk v Zavarovalnica Triglav C-162/13. (See pars 34, 52 and 59). Vnuk turned, amongst other things, on the interpretation of Article 3(1) of the first EU motor insurance Directive72/166/EC EU of 24th April, 1972 (it should be noted that that directive and all subsequent directives are now consolidated in Directive 2009/103/EC “relating to insurance against civil liability in respect of the use of motor vehicles, and the enforcement of the obligation to insure against such liability”). This case exemplifies the factors which may contribute to changes in the MIBI Agreements. The CJEU extended the parameters of required compensation by holding that accidents occurring in the course of the normal use of a vehicle must be covered. The effect of that case is that accidents occurring on private property must now be covered. Therefore, failure to insure in respect of accidents on private property may allow a victim to seek compensation from MIBI in the future.
4. The UK MIB Agreements:
4.1 There are two relevant MIB Agreements in the UK, the “Uninsured Drivers” Agreement and the “Untraced Drivers” Agreement. The first MIB Agreement was concluded on 31st December, 1946. This agreement was amended in November 1972, and renamed the “Compensation of Victims of Uninsured Drivers” or the “Uninsured Drivers” Agreement. The second, the “Untraced Drivers” agreement, was concluded in 1969 and also replaced in 1972. Prior to this later agreement payments in respect of untraced drivers were only made on an ex gratia basis. Both Agreements are determinable by either the MIB or the relevant Secretary of State on 12 months notice and have been amended on various occasions, most recently in 2017.
4.2 Under the UK Road Traffic Act 1988 it is compulsory for insurers to be a member of the UK MIB. Similarly, in Ireland, s. 78 of the 1961 Act made it compulsory for all insurers to be members of MIBI.
5. The Insurance Compensation Fund
5.1 The Fund was first established following the enactment of the Insurance Act 1964 (“the 1964 Act”). Provision was made for the Fund in s. 2 of that Act. Its administration is conferred on the Accountant of the Courts of Justice. Generally speaking, the Fund only applies to non-life insurers and the 1964 Act provides for funding by means of a levy on the insurance industry and loans from government. Section 6 provided that the Fund is to be financed by way of contributions from applicable insurers.
5.2 Section 4 of the 1964 Act states that a grant of IR£30,000 would be made available by the relevant minister to specifically address the payments made by the liquidator of Equitable Insurance (“Equitable”) under the provisions of s. 3 of the Act. Section 3 allowed for the payment out of the Fund of monies due by the liquidator of Equitable to meet certain claims. It is common case that the collapse of Equitable Insurance was unprecedented in Ireland at that time and closely preceded the enactment of the 1964 Act.
5.3 Section 3(7) of the 1964 Act, as inserted by the Insurance (Amendment) Act 2011 (“the 2011 Act”) states:-
“Where, in respect of a sum due under a policy, a payment equal to the whole of the sum is made by the Motor Insurers Bureau of Ireland, a payment shall not be made out of the Fund under this section in respect of the sum, and where, in respect of such a sum, a payment equal to the part of the sum is made by that Bureau, a payment out of the Fund in respect of the sum shall not exceed the amount of the sum less the amount of the payment by that Bureau.”
5.4 This provision is virtually identical in form to its predecessor, s.3(4) of the 1964 Act, as originally enacted. That provision contained five subsections and has been amended several times, by the Insurance (No. 2) Act 1983; the Insurance (Miscellaneous Provisions) Act 1985 (the “Act of 1983”); the Insurance Act 1989 (the “Act of 1989”) and the 2011 Act. It is instructive to refer here to some of those amendments which affected the evolution and operation of the Fund.
5.5 Section 3(2) of the Insurance Act, 1989, inserted new sections (1B), (1C), (1D), and (1E).
5.6 Subsection (1B)(a) authorises payments out of the Fund to the liquidator of an insolvent insurer in respect of sums arising under a policy, including costs in securing the sum. Subsection (1B)(b) limits payments made out of the Fund in respect of subsection (1B)(a) to 65% of the total sum. Subsection (1C) stipulates that the 65% limit in subs. (1B)(c) applies to payments out of the Fund in respect of a liability of an insured to a third party.
5.7 Subsection (1D) expressly prohibits any payments out of the Fund under subs. (1B) in respect of a body corporate or unincorporated body of persons, unless and only in so far as a liability is owed to or by an individual. Furthermore, Section 31(1) effectively halted payments out of the Fund to a liquidator of an insolvent insurer in respect of sums arising under subs. 1A (as inserted by the Insurance Act, 1989) insofar as they related to a refund of premium to an insured,
5.8 Most recently, s.4 of the 2011 Act effectively repealed all intermediate amendments and wholly substituted section 3 of the 1964 Act and inserted sections 3A, 3B and 3C.
5.9 Section 4 of the 2011 Act also introduced a new subsection 3(2) into the 1964 Act, which was not contained in s.3 as originally enacted. Section 3(2) states:-
“The High Court shall order a payment under subsection (1) only if it appears to the High Court that it is unlikely that the claim can be met otherwise than from the Fund.”
5.10 Section 3A of the 1964 Act, as inserted by s. 4 of the 2011 Act, also provides that payments out of the Fund may be made to the liquidator of an insolvent insurer to discharge sums due or owing in respect of policies issued by that insurer. Section 3A(3) provides that a person must repay to the Fund any amounts subsequently received in excess of the sum due to them.
6. The Relevant MIBI Agreement
6.1 As noted earlier the central question on this appeal is as to whether, properly construed in the light of all relevant circumstances, the MIBI agreement applicable (being the 2009 agreement) (“the Agreement”) covers liability in respect of drivers who were insured but whose insurer becomes insolvent and thus unable to meet the claims of third parties against the drivers concerned.
6.2 In that context it is necessary to set out those provisions of the Agreement which might be said to at least have some bearing on that question. The principal clause of the agreement which places an obligation on the MIBI to meet claims is clause 4 which is under the heading “Satisfaction of Judgements by MIBI”. Clauses 4.1.1 and 4.1.2 are particularly relevant and are in the following terms:-
“4.1.1 Subject to the provisions of clause 4.4, if Judgement/Injuries Board Order to Pay in respect of any liability for injury to person or death or damage to property which is required to be covered by an approved policy of insurance under Section 56 of the Act is obtained against any person or persons in any court established under the Courts (Establishment and Constitution) Act, 1961 (No.38 of 1961) or the Injuries Board established 6 by the PIAB Act, 2003 whether or not such person or persons be in fact covered by an approved policy of insurance and any such judgement is not satisfied in full within 28 days from the date upon which the person or persons in whose favour such judgement is given become entitled to enforce it then MIBI will so far as such judgement relates to injury to person or damage to property and subject to the provisions of this Agreement pay or cause to be paid to the person or persons in whose favour such judgement was given any sum payable or remaining payable thereunder in respect of the aforesaid liability including taxed costs (or such proportion thereof as is attributable to the relevant liability) or satisfy or cause to be satisfied such judgement whatever may be the cause of the failure of the judgement debtor.
4.1.2 Subject to the provisions of clause 4.4, the MIBI shall satisfy, as soon as reasonably possible, any judgement in favour of a person who has issued proceedings pursuant to clause 2.3”
6.3 It is also of some relevance to recall, as noted earlier, that there were two agreements entered into in 1955. The first, the original agreement, was between insurance companies and the Minister and provided for the establishment of MIBI. The second, which post dated the MIBI coming into existence, was between the Minister and MIBI itself. The genesis of the commitment to provide for the satisfaction of relevant judgments was to be found in clause 2A of the original agreement under which insurers agreed to procure that MIBI would enter into an agreement with the relevant minister which agreement would contain provisions including the following term:-
“That if judgment in respect of any liability for injury to person which is required to be covered by an approved policy of insurance under Section 56 of the Act is obtained against any person or persons in any court established under the Courts of Justice Act, 1924 (No. 10 of 1924) whether or not such person or persons be in fact covered by an approved policy of Insurance and any such judgment is not satisfied in full within 28 days from the date upon which the person or persons in whose favour such judgment was given any sum payable or remaining payable there-under in respect of the aforesaid liability including taxed costs (or such proportion thereof as is attributable only to injury to person) or satisfy or cause to be satisfied such judgment whatever may be the cause of the failure of the judgment debtor to satisfy the same.”
6.4 It will be seen that the broad thrust of the core obligation to satisfy judgments has remained much the same since the initiation of the arrangements in 1955.
6.5 Clause 2 of the Agreement states as follows:
“Enforcement of Agreement
A person claiming compensation by virtue of this Agreement (hereinafter referred to as “the claimant”) must seek to enforce the provisions of this Agreement by:-
2.1 making a claim directly to MIBI for compensation which may be settled with or without admission of liability, or
2.2 making an application to the Injuries Board citing MIBI as a respondent under the terms of the PIAB Act 2003 which, pursuant to s.12(1), provides that unless and until such an application is made, no proceedings in court may be brought in respect of the claim,
2.3 citing MIBI as co-defendants in any proceedings against the owner and or/user of the vehicle giving rise to the claim except where the owner and user of the vehicle remain unidentified or untraced, or
2.4 citing MIBI as sole defendant where the claimant is seeking a court order for the performance of the Agreement by MIBI provided the claimant has first applied for compensation to MIBI under the clause 2.1 and has either been refused compensation by MIBI or has been offered compensation by MIBI which the claimant considers to be inadequate and/or applied to the Injuries Board as at 2.2 and having received a release from the Injuries Board to proceed with legal action.”
6.6 The relevant aspects of Clause 3 of the Agreement state as follows:
“Conditions precedent to MIBI’s liability
The following shall be conditions precedent to MIBI’s liability:
…
3.4 The claimant shall co-operate fully with An Garda Síochána or any other authorised person in their investigations of the circumstances giving rise to the claim
…
3.6 The claimant shall endeavour to establish if an approved policy of insurance covering the use of any vehicle in the accident exists by demanding or arranging for the claimant’s legal representative to demand insurance particulars (including policy number if available) of the user or owner of the vehicle in accordance with the provisions of section 73 of the Road Traffic Act, 1961. Provided the claimant or his legal advisers have made this demand in writing and he has been unsuccessful in so establishing after two months from the date of the accident, notification to MIBI may then take place. If within that two month period the claimant can present to MIBI written confirmation from a member of An Garda Síochána or the owner and/or user of the vehicle giving rise to the claim, then notification may take place immediately.
…
3.9 The claimant shall give not less than twenty eight days notice to MIBI before issuing a motion for judgment against any person which may give rise to an obligation by MIBI.
…
3.11 All judgements shall be assigned to MIBI or its nominee.
…
3.13 Any accident giving rise to a claim made to the MIBI shall be reported by the claimant to An Garda Síochána within two days of the event or as soon as the claimant reasonably could.”
6.7 Clause 9 states as follows:
“Recoveries
Nothing in this Agreement shall prevent any vehicle insurer from providing by conditions in its contracts of insurance or by collateral agreements that all sums paid by it on behalf of MIBI or by MIBI by virtue of the Principal Agreement or of this Agreement in or towards the discharge of the liability of its policyholders shall be recoverable by it or by MIBI from the policyholder or from any other person.”
6.8 The relevant text to the Preamble to the Agreement states as follows:
“AGREEMENT
Text of an Agreement dated the 29th day of January 2009 between the Minister for Transport and the Motor Insurers’ Bureau of Ireland, extending, with effect from dates specified in the Agreement, the scope of the Bureau’s liability, with certain exceptions, for compensation for victims of road accidents involving uninsured or stolen vehicles and unidentified or untraced drivers to the full range of compulsory insurance in respect of injury to person and damage to property under the Road Traffic Act, 1961 .”
6.9 On one view the contents of the memorandum of association of the MIBI may be relevant to the proper construction of the Agreement for the sole purpose of the incorporation of the MIBI was to enable it to enter into the original agreement and, by implication, its successors. In that context it should be noted that the memorandum of association has been amended and what follows is the relevant text of that memorandum including any amendments up to and including those passed at an EGM of the company on the 18th December, 2009. It is first, perhaps, appropriate to note certain of the objects of the company which are set out in clause 3 of the memorandum of association. The following sub-clauses are argued to be of relevance to the issues which arise in this case.
“3.1 to enter into agreements and makes arrangements in compliance with current agreements or future agreements with the Minister for Transport (hereinafter called “the relevant Minister”) of the Republic of Ireland responsible for compulsory motor vehicle insurance and connected matters for the compensation of victims of road accidents, (other than the exceptions as provided in the Agreement dated 29th January 2009 between the Minister for Transport and the Motor Insurer’s Bureau of Ireland) involving either uninsured vehicles, stolen vehicles, unidentified drivers or untraced drivers which are required to be covered by contracts of insurance under the Road Traffic Acts 1961 – 2006 as amended or by common law, or a provision of the treaties of the European Community, or an act, regulation or directive adopted by an institution of the European Community, or otherwise.
…
3.12 to pay, satisfy or compromise any claims made against the Bureau which it may seem expedient to satisfy or compromise, notwithstanding that there may be no obligation to do so in law, and to effect counter guarantees.
…
3.19 to enter into agreements with the relevant Minister or any minister or department of state in the Republic of Ireland or elsewhere in relation to the payment of claims by third parties in respect of death or injury to persons or properties suffered in an accident arising out of or in consequence of the driving, ownership, management or control of a motor vehicle or to enter into such agreements either as principal or agent and generally act as agents in this country or of any organisations or associations concerned with the business of motor vehicle insurance whether established in this country or outside it.
…
3.27 to do all such other things that are incidental or conducive to the attainment of the above objects or any of them.”
6.10 Certain provisions of the articles of association are also said to be of relevance. These include Art. 10 concerning cessation of membership the relevant parts of which are in the following terms:-
“10.1.1 A member shall cease ipso facto to be a Member where such Member:-10.1.1 goes into liquidation, has a receiver appointed over its assets, goes into examinership or is insolvent;
10.1.2 ceases to transact or carry on motor vehicle insurance business in the State;
No such Member, while continuing to transact motor vehicle insurance business in the State, shall be entitled to resign its membership.
Any such member ceasing to be a Member shall nevertheless remain liable for its or his share (pro rate or otherwise) of all obligations (including but not limited to the obligations of a Member under Article 63.3) arising prior to such resignations and during that current year in which the resignation takes effect.
Upon the occurrence of any event listed in Article 10.1.1 or 10.1.2 any payments which the Bureau may as a result be called upon to make on a Member’s behalf to any creditor shall be contributed solely by the other members respectively. IN each case contributions actually payable by each of the other members shall be made in proportion to their respective levies within their respective group’s actual percentage of the total Bureau levy (relative to the year in which the Bureau meets the said contribution.).
…
10.5 Where any Member ceases to be a Member he shall remain fully liable in respect of all obligations incurred by him in virtue of his membership of the Bureau before its cessation and, for the avoidance of doubt, where an incident arises prior to cessation of membership and that incident would give rise to an obligation on that Member by virtue of his membership then that Member shall remain fully liable in respect of that obligation notwithstanding his being unaware of such incident or obligation prior to the cessation of his membership.”
6.11 In addition Art. 63 sets out the mechanism whereby members are required to start and end making their contribution towards the Funding of the MIBI. It must, of course, be recalled that each insurer providing motor insurance in the State is required to be a member. Thus any new insurer entering that market is required to join the MIBI and any insurer leaving that market may then leave the MIBI. Article 63 is designed to deal with the commencement and cessation of the obligations of members in that context and is in the following terms:-
“63.1 In the first calendar year of membership a Member will be required to pay a joining fee and an annual membership fee in accordance with Article 7. The annual membership fee in the first calendar year of membership shall be calculated on a pro rata basis from the actual date the new Member was admitted to the 31st December in the same calendar year.
63.2 Levies on new Members will be payable by each new Member in accordance with the provisions of Article 62.
63.3. A levy will continue to be assessable on and payable by a Member for the calendar year following the year in which that Member ceases to transact motor vehicle insurance business in accordance with the terms of Article 10.3 and the basis for the calculation of that levy will be the GWP recorded by the Member in its final calendar year of carrying on motor vehicle insurance business in the State.”
6.12 Two further matters are also said to be potentially relevant. The first is a note to the financial statements of the MIBI for the year ended 31st December, 2012 which is in the following terms:-
“As stated in the Report of the Board, in the event of the insolvency of any of its members, the Bureau is required, under its agreement with the Minister for Transport, to pay claims, to the extent that its insolvent members are unable to do so. No provision has been made for this contingent liability in these financial statements.”
A similar note appeared in many previous financial statements.
6.13 Finally, it may be of some relevance to make reference to certain extracts from a letter written by the Chief Executive Officer of MIBI to the then President of the Law Society on the 29th September, 2014 which deals with what is said to be the position of the relevant department. The Minister is, of course, the other party to the MIBI agreement and it is said that the Minister does not dispute MIBI’s construction of the agreement to the effect that it does not provide for a liability in the case of insolvent insurers. The relevant extract is in the following terms:-
“As you are aware from our more recent exchange in July of this year the MIBI had sought legal advice to ascertain whether the MIBI was liable to make payments to discharge an unsatisfied judgment in respect of a Setanta related claim under the 2009 Agreement. The legal opinion was unequivocal in its conclusion that the 2009 Agreement did not require the MIBI to satisfy awards against drivers covered by an approved policy of insurance where the insurer was unable to pay all or part of the award because of insolvency.
…
The Department [of transport] recently responded and has confirmed that it is the Department’s position that there is no legal obligation on the MIBI to satisfy claims made against policyholders of Setanta.
The MIBI has its own legal advice, there is the advice of the Attorney General obtained by the Department of Transport and Department of Finance have confirmed the position to the Finance Committee of the Oireachtas and to the Dáil.”
6.14 Against that background it is next necessary to turn to the respective arguments put forward by the parties.
7. The Argument
7.1 As noted in the introduction to this judgment, the MIBI agreement which governs the legal obligations which arise in this case makes no express provision, one way or the other, as to whether the compensation mechanism provided for in the agreement is to be applicable in the case of insolvent insurers. It follows that the position of each of the parties was to point to aspects of the Agreement, its predecessors, the legislation governing the Fund and other surrounding circumstances for the purposes of suggesting that an interpretation favourable to their case was more appropriate. Thus a range of provisions of the MIBI agreements, the relevant legislation and the facts were called in aid on both sides with, hardly surprisingly, emphasis being placed on those elements of the agreements and other materials which might be said to tend to favour one view or the other. Against that backdrop it is appropriate to set out the principal arguments of the parties by reference to those aspects of the agreements, legislation and facts which were argued potentially to have an influence on the overall determination of the scope of the obligations arising under the relevant MIBI agreement. Many of the points raised by either side were pursued in detail with rebuttal following reply aided, I suspect, by the fact that the case had already been argued twice before it reached this Court. What follows is a description of the main thrust or principal themes of the argument. For the sake of brevity some detail has been omitted.
7.2 However, before going on to consider the specific provisions of the documentation which are said to be relevant to the issue in this case, it is of some importance to identify one general question concerning the proper approach to the construction of the agreement to which it will be necessary to return. The general principles applicable to the construction of contracts were not in dispute. However, at least on one view, it was possible that the question of whether it was appropriate to characterise the agreement as being “administrative” or alternatively “contractual” in nature might have some relevance to its proper construction. MIBI argued that the Agreement is purely contractual in nature save, perhaps, for the fact that it is intended to, and in fact does, confer rights on persons who are not parties to the agreement being persons who are injured as a result of the negligence of drivers in circumstances covered by the terms of the Agreement. On the other hand the Law Society contended that the Agreement has at least significant public law features which, it was said, potentially affect both the proper interpretation of the agreement itself and the extent to which it might, in certain circumstances, be permissible for the MIBI to rely on the strict terms of the agreement.
7.3 Perhaps it might be said that the key argument which emerged between the parties was as to whether, as the Law Society argued, the Agreement, and in particular clause 4, provides for compensation to a broad class of injured parties or whether, as the MIBI argued, the Agreement is designed to cover a narrower class. In substance, leaving aside untraced or unidentified cases which are not fully relevant to the issue in this case, the debate was whether the Agreement extended only to persons who did not have a valid policy of insurance or whether its scope was wider and extended to any case where qualifying compensation was not paid.
7.4 The starting point for any description of the argument must, therefore, be article 4 itself for it is that article which specifies the primary obligation. I, therefore, turn to the arguments put forward by the parties in respect of the proper construction of that article and then go on to consider the other aspects both of the various MIBI agreements, the legislation and the surrounding facts and circumstances which are called in aid by either side.
7.5 It will, of course, be necessary to consider the judgments of both the High Court and the Court of Appeal. However, it is appropriate to set out the positions of the parties first so as to place those judgments in context.
(i) Clause 4.1
7.6 A key provision of the Agreement, of course, is clause 4.1.1. The Law Society argues that the terms of that clause are sufficiently wide to include liability for insolvent insurers. MIBI argue to the contrary and suggest that if it had been intended that the agreement apply to a potentially wide class of persons, such as drivers who held a valid policy of insurance from an insurer who become insolvent, then it would have been expected that an express clause to that effect would have been included. In one sense that fundamental argument was about what the default position was. The Law Society argued that the terms of clause 4.1 were sufficiently wide so that it would have required a clear exclusion to remove any potential obligation to compensate in the case of insolvent insurers. On the other hand the MIBI argued, as just noted, that the obligation which would be placed on the remainder of the insurance industry to pick up the tab in the case of a collapsed fellow insurer was such that it would have required a clear express inclusion.
7.7 As will have been seen the basic structure of clause 4 requires the MIBI to satisfy any judgment of the type specified in the clause which remains unsatisfied for 28 days from when the relevant judgment becomes enforceable. The category of judgment covered refers to one arising from a “liability for injury … which is required to be covered by an approved policy of insurance under (the relevant legislation) …”. The Law Society suggests that the wording of that clause does not require that the driver whose liability gives rise to the relevant judgment actually be uninsured but rather it is said that the clause simply provides that the MIBI will satisfy any judgment arising from circumstances which were the subject of compulsory insurance which remains unsatisfied for 28 days. However, other aspects of clause 4 itself were also the subject of significant debate.
7.8 The first such provision is the phrase appearing both in clause 4.1.1 and also in its ultimate predecessor, clause 2A of the original arrangement. In both of those clauses the phrase “whether or not such person or persons be in fact covered by an approved policy of Insurance…” is used. The Law Society suggests that this phrase makes clear that the question of whether or not there is a policy of insurance in existence is not material to the issue of the obligation of the MIBI to compensate. On that basis it is argued that the fact that there may have been a policy in existence at the time of an accident but that the relevant insurer became insolvent thereafter does not affect the scope of the agreement. On the other hand the MIBI suggests that the relevant phrase is designed to deal with situations where a policy is validly repudiated after an accident. In such a case the insurer is not contractually bound to their insured. On the other hand, it is pointed out that an insolvent insurer remains subject to a liability to their insured and, thus, onward to a party injured by that insured, even though the insurer may not be able to meet that liability due to its insolvency.
7.9 Next there was some debate concerning the relevance of the use of the phrase “the Bureau’s liability… for compensation for victims of road accidents involving uninsured or stolen vehicles and unidentified or untraced drivers” in the preamble to the Agreement. The MIBI suggests that the use of that phrase is consistent with its argument that clause 4.1.1 is intended to cover a limited class only being the class defined by that phrase. However, the Law Society argues that the substantive terms of the agreement itself do not, in its primary operative clause, include such a limitation and also repeat the argument made, in a different context, about the meaning of the word uninsured by reference to the time at which a person might be said to be uninsured. In rebuttal the MIBI argue that a person who holds a policy with an insolvent insurer nonetheless remains insured even though there may be little practical benefit in the insurance in question.
7.10 Finally, the Law Society places reliance on the phrase contained in both clause 4.1.1 of the Agreement and clause 2A of the original agreement where it is specified that the relevant liability is to arise “whatever may be the cause of the failure of the judgment debtor to satisfy same”. It is argued that this is in very wide terms and would clearly cover a case where the problem arose from the insolvency of the judgment debtor’s insurer. The MIBI argue that the phrase is intended to clarify that the MIBI will discharge a liability regardless of the reason for the failure of the insurer to pay but only within what it argues is the limited class of case covered by the agreement.
7.11 However, each of the parties suggested that assistance in the proper construction of clause 4.1 could be gained from a range of other materials such as the legislation concerning the Fund, the Memorandum and Articles of Association of the MIBI, certain case law and the surrounding facts. In that context it is necessary to set out the principal issues raised starting with the 1964 Act and in particular section 3(7) thereof.
(ii) Section 3(7) of the 1964 Act
7.12 The Law Society refers to various statutory provisions in support of their argument. In particular it is said that the argument in favour of the broad ambit of liability in clause 4.1.1 of the Agreement is reinforced by s.3(7) of the 1964 Act. That section provides that payment should not be made out of the Fund where a payment has been made by the MIBI. The Law Society argues that this section implies that the primary liability should rest on the MIBI and that the Fund should only become liable on a secondary basis. On the other hand, the MIBI suggests that the purpose of s.3(7) is simply to avoid a double payment.
7.13 Section 3(7) does not, of course, expressly state that the MIBI is to be liable in any particular circumstances. However, the Law Society argues that the section contemplates the possibility that the MIBI might be liable in a case where the insurer was insolvent for otherwise, it is said, the Fund would have no role. On the other hand the MIBI suggests that a liability on the MIBI could not arise, under statute, by implication in circumstances where the MIBI agreement itself makes no express relevant provision.
7.14 The argument also touched on the fact that the Fund is applicable in the case of all non life insurers. Obviously those insurers providing motor insurance are a subset of that general class. The MIBI agreement, of course, only applies to motor insurers. Thus only motor insurers fund the MIBI but all non life insurers have obligations to the Fund. Section 3(7) of the 1964 Act refers to a sum due under a policy although the Law Society argues that the only policies which could, in practise, have relevance in the context of excluding a payment from the Fund where a payment had been made by the MIBI must be a payment arising under a motor insurance policy on the basis that it is only under such a policy that the question of a payment by the MIBI could arise.
7.15 On the question of the MIBI’s “double payment” argument it should be noted that s.4 of the 1964 Act, as originally enacted, stated that the Minister was to make a grant to the Fund “ for the purpose of making payments under section 3 of this Act to the liquidator of the Equitable Insurance Company, Limited .” Section 4 of the Act of 1964 was repealed by section 5 of the 2011 Act. However, that same Act also re-enacted section 3(4) of the Insurance Act 1964, now section 3(7). The MIBI say that speculation as to why the provisions of s.3(7) were retained by the 2011 Act is not permissible. The Law Society, however, suggests that it is a principle of construction that the Oireachtas does not legislate in vein. On that basis it is said that the re-enactment of the subsection (now s.3(7)) is contrary to the view that the provision was designed only to prevent double recovery in the context of Equitable.
7.16 In that context a debate arose as to whether there were any circumstances in which s.3(7) could have practical application even if the MIBI interpretation of their obligations was correct. In other words were there, in practise, circumstances where the MIBI might make a payment in relation to a case where an insurer ultimately became insolvent and where the prevention double recovery, which the MIBI argues is the sole purpose of s.3(7), might operate in practise. It is said that there are certain circumstances where the MIBI might make a payment on the basis of the situation then appearing but where subsequent events might change the situation. If, in such a context, a relevant insurer were to become insolvent then, it is said, s.3(7) could apply and would have the effect of preventing the Fund from having to pay out in such circumstances. This might happen where MIBI makes a payment and it later transpires that an insurance policy was in existence or where there is a dispute as to cover or where the driver is unknown but later identified or where an untraced vehicle is subsequently traced.
7.17 The Law Society places reliance on the fact that untraced or unidentified drivers were only covered by the possibility of an ex gratia payment under the 1955 or 1964 Agreements so that, it is argued, those cases could not have been in contemplation in the context of section 3(7). MIBI suggests, however, that, given the focus on the re-enactment of s.3(7) in 2011, it is relevant to take into account the fact that, by that time, untraced or unidentified drivers were within the full ambit of agreement and not just confined to the potentiality for an ex gratia payment.
7.18 It is next necessary to return to certain other articles of the Agreement which are said to influence the proper construction of the Agreement as a whole.
(iii) Conditions Precedent and Enforcement (Articles 2 and 3 of the Agreement)
7.19 The starting point under this heading is a suggestion that the case law in this area confirms that the conditions precedent set out in Art. 3 of the Agreement require to be strictly construed and complied with even where no prejudice is established (see for example O’Flynn v. Buckley, Walsh MIBI and Horan [2009] 3 I.R. 311). MIBI suggests that certain of those conditions precedent, in particular Arts. 3.4, 3.6, 3.9 and 3.13, are consistent with the liability of the MIBI extending only to a limited class of person (including uninsured drivers but not those whose insurance becomes practically ineffective by the insolvency of the relevant insurer) rather than the wide class contended for by the Law Society (being any person in whose favour an order is made which remains unsatisfied for 28 days). Conditions concerning cooperation with an Garda Síochána in investigations, reports to the garda and attempts to establish the existence of a policy of insurance are said to fall into this category. In addition it is said that the requirement to be found in clause 3.9, being to give notice to the MIBI before issuing a motion for judgment, could not have been complied with in the case of a party injured by the negligence of a Setanta insured where the injured party had brought a motion for judgment prior to Setanta going into liquidation.
7.20 To the extent that it might be argued that these conditions precedent can be complied with in some, although not all, Setanta insured type cases, MIBI argues that the agreement could not have been intended to cover some but not all persons in a particular class.
7.21 The Law Society suggests that clause 3 cannot be said to override what is submitted to be the clear wording of clause 4.4.1.
7.22 In addition the Law Society suggest that the interpretation sought to be placed on much of clause 3 by MIBI would mean that many of the same clauses equally might not necessarily be complied with in the case of an accident caused by the negligence of a driver who appeared to have a policy of insurance but where, for one reason or another, that policy was not valid or was properly repudiated. In such a case the injured party might have no reason to believe that there was any need to instigate investigations by an Garda Síochána and might believe that there was an approved policy of insurance in place. The Law Society suggests that it could never have been the intention to exclude such cases for the ambit of the MIBI scheme.
7.23 In the context of the enforcement of the agreement, the MIBI notes that clause 2 requires that the MIBI be joined as a co-defendant in proceedings except in cases where the owner and user of the vehicle remain unidentified or untraced. Likewise, the MIBI is required to be the sole defendant in the cases covered by clause 2.4. It is argued that this provision is inconsistent with the contention that the agreement covers insolvent insurers for it is said that the proceedings might well predate the insolvency concerned. In those circumstances it would not, of course, have been within the contemplation of the plaintiff concerned to join the MIBI for the need to rely on the MIBI agreement would not be apparent.
7.24 However, the Law Society state that the provisions concerning enforcement cannot be used to limit the coverage of the agreement specified in clause 4 and in particular note that the MIBI may be joined as a sole defendant where a party has applied for compensation and has been refused. It is said that there is no reason in principle why those events could not occur after an insolvency has arisen so as to trigger the enforcement mechanism set out in clause 2.4.
(iv) Conflict between Clauses 3 and 4
7.25 As already noted a key part of the Law Society argument is that the wording of clause 4 appears to relate to any case where a judgment remains unpaid after 28 days. On the other hand, as just noted, an important part of the argument of the MIBI draws attention to the conditions precedent set out in clause 3 and the suggestion that at least some of those conditions cannot be met in the case of drivers insured by a collapsed insurance company. The Law Society, while not accepting the interpretation of the MIBI of the effect of clause 3, nonetheless argues that clause 3 is insufficient to displace the clear wording of clause 4. However, the MIBI place reliance on the fact that clause 4.1.1 includes the phrase “subject to the other provisions of this agreement” so that, it is said, the wording of that clause cannot be read in isolation. On the other hand the Law Society suggests that MIBI’s case involves a rewriting of clause 4.1.1 rather than its interpretation in accordance with the other terms of the agreement.
7.26 Having considered the relevant clauses of the Agreement and the legislation it is now necessary to turn to certain other materials which are said to be relevant.
(v) The Articles and Memorandum of Association
7.27 Part of the argument put forward by MIBI relied on the suggestion that an intention not to provide compensation in the case of insolvent insurers can be gleaned from the Memorandum and Article of Association of the company. Reliance is placed on clause 3.1 which refers to providing compensation in respect of uninsured, unidentified or untraced cases. Thus it is argued that the scope of agreements which are in the power of MIBI must be confined in a like manner. It is said that any agreement which went beyond the scope of that contemplated in the objects clause would potentially be ultra vires. While it was not suggested that that would, in itself, render a wider agreement invalid, nonetheless it is said that it cannot have been the intention of the Minister to enter into an agreement which was ultra vires. In that context attention is drawn to the fact that the Minister may well have been aware of the Memorandum and Articles of Association of the MIBI at the time of the 1955 Agreement
7.28 On that basis it is necessary to look at the relevant provisions of the Memorandum and Articles of Association. The precise terms of clause 3.1, as cited earlier, provide for the payment of compensation to the victims of road accidents “involving… uninsured vehicles…”. That raises, in turn, the question of the time at which it is required that the vehicle be uninsured. MIBI argues that the natural meaning of the phrase contained in the clause in question is that the vehicle must be uninsured at the time of the accident. On that basis it is said that a driver who has a valid policy of insurance at the time of an accident, but whose insurer subsequently becomes insolvent, cannot be said to be uninsured for the purposes of the clause. On the other hand the Law Society suggests that the interpretation sought to be placed on the clause by MIBI would be inconsistent with cover being provided in cases where a policy of insurance is repudiated.
7.29 Leaving aside the proper construction of the Articles and Memorandum, the Law Society also argues that the original agreement between the Minister and the motor industry, which contemplated the establishment of the MIBI, predates the Articles and Memorandum. While it is, of course, accepted that each of the MIBI agreements were entered into after the MIBI had been established and after, therefore, its Memorandum and Articles of Association had come into existence, it is nonetheless said that there is a consistency between the scope of the obligations undertaken by the MIBI which dates back to the original agreement entered into between the industry and the Minister such that, the Law Society argues, little assistance can be given in construing the scope of the MIBI’s obligations from the Articles and Memorandum. It is also argued that, given that the purpose of the agreement is to benefit persons injured as a result of the negligence, those persons cannot properly be said to have their entitlements reduced by reason of the Articles and Memorandum in the light of the then applicable section 8 of the Companies Act, 1963. On the other hand the MIBI argues that the claims of injured parties are ultimately derivative of the entitlement of the Minister because it is the Minister who is the contracting party.
7.30 On that basis it is suggested that the scope of the agreement must be interpreted by reference to the position only of the contracting parties being the Minister and the MIBI. On that basis it is said that the scope of the agreement, insofar as it relates to injured parties, cannot be greater than the scope of the agreement which the Minister, as a party, could enforce. In that context both parties comment on Tevlin v. McArdle and MIBI [2014] IEHC 436.
7.31 The Law Society also places reliance on Art. 10.1 of the Articles of Association, already cited, which concerns the termination of membership of the MIBI by an insurer. Attention is drawn to the fact that clause 10.1.1 provides for automatic termination of membership in the event that a member goes into liquidation. MIBI argues that the proper interpretation of the agreement as a whole simply requires the MIBI to honour liabilities already incurred by the insolvent insurer prior to it ceasing to be a member meaning judgments already entered against insured covered by the insurer in question.
7.32 The wording of the relevant passage from clause 10.1 refers, amongst other things, to the circumstances when a member goes into liquidation or becomes insolvent. What follows is an obligation on the remaining members to contribute to any payments which the MIBI may be required to make on the insolvent former member’s behalf “to any creditor”. The MIBI argues that the use of the term “creditor” confines the case to one where there has already been a judgment against an insured of the now insolvent insurer. The Law Society, on the other hand, refers to the use of the term “all obligations” in the previous paragraph of Art. 10.1 and suggests that that paragraph extends the obligations being considered under para. 10.1 to all cases of liability or potential liability.
(vi) “The Equitable Collapse”
7.33 The historical role of the Fund, particularly in the context of the collapse of Equitable, is itself also a matter of contention between the parties. It is agreed that the MIBI previously paid out in respect of liabilities attributable to Equitable in 1963. However, the MIBI say that, because of the limited nature of the evidence, no inference should be drawn as to the legal basis of those payments and the fact of those payments should not influence the view of the relevant agreement which the parties held at that time. The MIBI assert there is no evidence that it did in fact accepted liability in respect of Equitable and it was suggested that any payments were likely to have been ex gratia. It was said that there is evidence, in the form of a 1964 departmental publication (“The 1964 Memoranda”), that the 1964 Act was enacted in the wake of, and to address, the liquidation of Equitable. This is said to form part of the “factual matrix” which should inform the Court’s interpretation of the intention behind the 1964 Agreement. Further reliance is placed on the fact that the 1964 Memoranda makes clear that the Fund was designed to address insolvent insurers’ liabilities. In any event, MIBI say that Re: Butler [1970] I.R. 45 is inconsistent with the MIBI being liable in this context and, it is submitted, that case “indicates” that all payments to Equitable after the enactment of the 1964 Act were out of the Fund alone. Therefore, the MIBI argues that section 3(7) is simply designed to prevent double recovery where payments were made to Equitable prior to the enactment of the 1964 Act and that this was at the forefront of the contracting parties’ thoughts in entering the 1964 MIBI Agreement.
7.34 On the other hand the Law Society points out that there is no reference in the MIBI’s 1966 Statement of Accounts which suggests that payments to Equitable were on an ex gratia basis and that some payments in respect of Equitable claims which were made by the MIBI appear to post-date the 1964 Act. The Law Society note there is no reference in the affidavit of Mr. Casey, the Chief Executive Officer of the MIBI, to the payments being ex gratia in nature. The Law Society say the 1964 Memoranda “indicates” that the MIBI was in fact requested to meet all of Equitable’s liabilities, even those not covered by the then applicable 1955 Agreement, but that the MIBI refused. (See High Court Judgment in this case, at para. 7.26). Therefore, it is said that there is no evidence to support MIBI’s proposition that the legal basis of the payments was either “unclear” or “ex gratia”. The Law Society do say that it is not clear as to whether payments were made out of the Fund in those cases in respect of motor policies or whether a judgment creditor existed for 28 days such as to invoke MIBI liability.
(vii) MIBI Internal Documents
7.35 The Law Society seek to place reliance on statements contained in each of the MIBI’s report and note to financial statements from 2005 to 2013 to the effect that, in the event of the insolvency of one of its members, the MIBI must cover claims “to the extent that its insolvent member is unable to do so”.
7.36 On the other hand the MIBI says that this note cannot be said to reflect the common intention of the parties to the MIBI agreement (because it is argued that the Minister was not informed of the note) and cannot, on that basis, be relevant to the proper interpretation of the agreement.
7.37 In addition it is said that no estoppel could arise because the note is addressed to the members of the MIBI and not either the Minister or the public so that no reliance can be said to have been placed on the note.
7.38 Ultimately the MIBI state that the note is in error. It is said that it cannot, as extrinsic evidence of the intention of one of the parties, be taken to be evidence which can influence the proper interpretation of the agreement. In that regard reliance was placed on Phipson On Evidence (17th Ed. para. 42-12).
(viii) Business Sense
7.39 The MIBI suggest that the interpretation placed on the agreement by the Law Society, and approved by the Court of Appeal, would flout ordinary business sense and should, therefore, only be accepted if the agreement clearly provided for the acceptance by the MIBI of liability in respect of insolvent insurers. First it is said that such a construction would require other insurers to guarantee a competitor company which operated a high risk strategy in relation to writing insurance. This, it is said, would undermine the business model of companies with a low risk strategy.
7.40 Second, the MIBI argues that imposing a liability on continuing insurers in the case of an insolvent competitor could lead to a knock-on effect where the liabilities thus imposed led to significantly increased liabilities to the MIBI being placed on the balance sheets of the surviving insurers. Next it is said that any potential liability to cover claims against drivers insured by an insolvent insurer would amount to a contingent liability in respect of which provision would need to be made. However, no realistic appraisal of the appropriate level of provision could be achieved without access to the financial data of those competitors.
7.41 However, the Law Society, placing reliance on ICDL v. ECDL [2012] 3 I.R. 327, and Arnold v. Britton [2015] UKSC 36, suggests that it is clear, as a matter of principle, that a business sense argument cannot be used to displace the clear wording of an agreement. The Law Society further argue that any issues under this heading can and should be addressed by the industry attempting to renegotiate the agreement with the Minister. Furthermore, the Law Society argues that the agreement needs to be seen in the context of the fact that its overall intention is to provide a mechanism to ensure that persons injured by the negligence of others receive compensation. The fact that insurers are required, therefore, to cover liabilities in respect of uninsured drivers means that such liability arises no matter how large the incidence of claims against such uninsured drivers may be.
(ix) The United Kingdom Case Law
7.42 The Law Society argues that certain passages in judgments delivered in the United Kingdom suggest that the interpretation given to the MIB Agreements in that jurisdiction was such that they were taken to cover cases involving insolvent insurers. Reliance in that regard is placed on Jacobs v MIB [2010] EWCA Civ 1208 at par 7, and Gurtner v Circuit [1968] 2 QB 587 at 598, and Bennett v Stephens [2010] EWHC 2194 at paragraph 16. On the other hand MIBI argues that the issue of the potential extension of liability of the United Kingdom MIB to cases involving insolvent insurers was not directly before the courts on the occasions in question. On that basis it is suggested that the comment which the Law Society seek to rely on are obiter dicta.
(x) Anomalies
7.43 While not necessarily said to be decisive, both sides did draw attention to potential anomalies in the overall operation of the compensation system for injured parties if the construction sought to be placed on the MIBI agreements by their opponent were to prevail.
7.44 The MIBI draws attention to the fact that the agreements are clear in requiring, as a condition to the payment of compensation to an injured party, that the entitlement of that injured party to recover from the negligent driver concerned must be assigned to the MIBI. In practise, therefore, the scheme ordinarily contemplates that, while the MIBI must pay the injured party, it retains the entitlement to recover any amount paid to the insured party from the driver whose negligence gave rise the liability in the first place. Obviously, in the case of persons who did not go to the trouble of getting insurance in the first place, this provision makes complete sense. If it should prove practical for the MIBI to seek to recover any money which it had to pay out then it can do so. The scheme, in effect, provides for a timely and straightforward payment mechanism in favour of the injured party rather than requiring that party to obtain judgment against a defendant and try and enforce it. But the uninsured driver whose negligence caused the problem in the first place does not escape liability and can be pursued if there is any point to it.
7.45 The application of that regime in the case of an insolvent insurer would, however, potentially mean that a driver, who had in place a policy of insurance where, through no fault of the driver concerned, the relevant insurer became insolvent, would be exposed to personal liability. On the basis of the Law Society’s interpretation of the agreements, it is said that the MIBI would have to pay the injured party but the MIBI, on its argument, could seek to recover any monies paid out from the driver. There was some debate about whether that consequence could truly arise in all the circumstances having regards to the terms of the agreement and the legislation concerning the Fund but it can be said that it remains a possibility. The argument in this regard was described by Ryan P. in the Court of Appeal as troubling. He recognised the injustice of imposing liability on a driver whose insurer happens to become insolvent. However, Ryan P. was of the view that it did not necessarily follow that such an unfortunate consequence could affect the proper interpretation of the agreements. Likewise, Ryan P. did make some mention of the possibility that there might be certain terms in an agreement which a party would not be entitled to seek to enforce because it would be unjust so to do.
7.46 There was also a connected issue concerning the extent to which it might be possible for such a driver to recover from the Fund. In the ordinary way the Fund is authorised to pay to the liquidator of an insolvent insurer sums arising under a policy but limited to 65% (and with a cap in certain circumstances) in respect of payments relating to the liability of an insured to a third party. On one view it might be said that a driver who becomes liable to the MIBI, as a result of the assignment to the MIBI of a judgment obtained by a party injured by the negligence of the driver concerned, could benefit from such a payment. Such a driver has, of course, a valid policy with the insolvent insurer. As a matter of contract between that driver and the relevant insurer, the now insolvent insurance company is obliged to cover the driver’s liabilities. The reason why the driver would in practice be liable to the MIBI would be because of the failure of the relevant insurer to meet its contractual obligations (by reason of its insolvency).
7.47 If that argument were correct it would follow that, in practical terms, the MIBI could pursue the driver concerned for the entire award to the injured party together with costs but the driver would be able, subject to some limitations, to obtain 65% of such sums from the Fund. Thus, in practice, at least in most cases, the driver would be exposed as to 35% of the total award (including costs) made in favour of the injured party. While that would be a significant exposure on the part of the relevant driver it does also follows that, if the interpretation advanced by the MIBI is correct, any driver who is insured by an insolvent insurer would face a similar exposure for the injured party could obtain judgment for the full sum properly due and only 65% (or less) would be met by the Fund thus leaving the injured party to pursue the individual driver for the balance.
7.48 On the other side of the coin the Law Society relies on that undoubted consequence of the MIBI being correct. As already noted the provisions of the 1964 Act, in their current form, make clear that the Fund only covers 65% of the total sums due by an insolvent insurer to injured third parties. It follows that, if the construction sought to be placed on the Agreement by the MIBI itself is correct, then those who are injured as a result of the negligence of drivers who are insured as of the date of the accident concerned but whose insurer becomes insolvent, are likely, as a matter of practice, to be confined to 65% (or less) of the total claim. This will be so unless the driver is a mark for the balance. On that basis the Law Society argues that it would be anomalous that someone who is injured due to the negligence of a driver who has no policy of insurance at all will get full compensation under the Agreement but a driver who, through happenstance, is injured by the negligence of a driver who has a policy of insurance but whose insurer becomes insolvent, will likely only receive 65% of full compensation. In such a case it is to be recalled that a significant element of the damages required to be paid to those who suffer catastrophic and life changing injuries are designed to provide financial support to make up for either lost income or the provision of necessary medical and other supports. The compensation which would be required to be paid to such a catastrophically injured person for that type of support would be likely to be cut by over a third if their only recourse is to the Fund.
7.49 It must, of course, be accepted that, outside the field of compulsory motor insurance, the potential to actually recover damages can depend on whether there is a defendant who is a mark. Sometimes that problem may well lead to one party receiving full compensation but an equally deserving party receiving no or much less compensation. However, the Law Society argues that, in the light of the fact that it has been the consistent policy for the last 60 years to attempt to ensure that those injured by the negligence of others in motor accidents do receive compensation, it would be a strange result if only one category of such persons (being those injured by the negligence of insurers who turn out to be insolvent) were to receive compensation which falls a significant way below the full amount to which they would ordinarily be entitled.
7.50 In addition, it is worth noting that those, such as employers, who are insured by insurers who become insolvent run the same risk of being directly exposed to the tune of at least 35% of any damages awarded. As O’Donnell J. suggests in his judgment in this case, it may well be that it was considered that those who enter into insurance with imprudent insurers (and who may, at least in some cases, have thereby benefited by unrealistically low premia) should be exposed to some of the potential liabilities which would flow from the insolvency of the insurer concerned. Be that as it may non-motor insured also have a potential exposure to being forced to meet part of claims brought against them which are covered by an insurance policy written by an insolvent insurer because the Fund will only meet a portion of the relevant claim thus leaving the person or company concerned exposed for the balance.
7.51 It follows that it is possible that there may be anomalies whatever the result of this case. There can be little doubt but that those anomalies could be cleared up either by amendments to the MIBI agreements or to changes in the relevant legislation or, indeed, both of those measures. However, a court is confined to dealing with the legal measures in place at any relevant time. If, on a proper construction of the relevant legal materials, anomalies arise then there is little that a court can do about it. The extent, if any, to which this Court should, in this case, have regard to the potential anomalous consequences of one interpretation or another is a question to which it will be necessary to turn in due course.
(xi) The Insurer Concerned
7.52 It is also necessary to mention the practical way in which the MIBI organises its internal business for, again on one view, it may be that this has some relevance to the proper construction of the agreements. It is unnecessary to go into any great detail relating to the concept of “insurer concerned”. Suffice it to say that there are internal mechanisms applied within the MIBI for identifying, in appropriate cases, the insurance company which is to deal with particular claims both administratively and financially. On the one hand it might be said that those practical measures for the implementation of the obligations of the relevant insurers form part of the factual matrix or context against which the agreements, and in particular those agreements subsequent to the original, which would have been negotiated against the backdrop of that mechanism being in place, should be construed. On the other hand it might be argued that whatever mechanism the insurers who are members of the MIBI might decide as and between themselves for distributing the burden of meeting claims covered by the Agreement (both as to the administrative burden of defending claims and the financial burden of making payments) is purely internal to the MIBI and cannot be said to play any legitimate role in the interpretation in the MIBI’s external obligations to compensate injured parties.
7.53 Having addressed the principal aspects of the documentation, the legislation and the facts which are called in aid by both sides it is necessary briefly to identify the reasons why the High Court and, in particular, the Court of Appeal found in favour of the construction urged by the Law Society.
8. The High Court Judgment
8.1 In his judgment Hedigan J. set out much of the facts and arguments which are already addressed in this judgment. He noted that the key phrases which are found in clause 4 of the Agreement are repeated from the original agreement and in particular clause 2 thereof. Hedigan J. suggested that the background to the MIBI Agreements generally was an intention to protect the innocent victims of uninsured drivers. In broad terms Hedigan J. came to the view that clause 4.1.1 (and its antecedents) covers liability in the case of an insolvent insurer. He went on to analyse the various arguments put forward on behalf of MIBI for suggesting that the narrower meaning of the scope of the Agreement should, nonetheless, be adopted. However, at para. 9(12), he concluded as follows:-
“The background against which this agreement was made, including the conduct of the parties thereto together with their conduct post 2009, does not provide any basis for changing the meaning of what the Agreement states. In my view the liability of the MIBI in this regard has been apparent and accepted since at the very least 1964, if not indeed 1955.”
8.2 On the business efficacy argument the trial judge noted that it might well be that developments in the insurance market on a European level had altered the parameters of risk contemplated by the MIBI Agreements. However, he expressed the view that that could not affect the meaning of those agreements which had, in his view, been understood to cover cases of insurer insolvency until quite recently.
8.3 On that basis Hedigan J. came to the view that the interpretation advanced by the Law Society was correct and so held.
9. The Court of Appeal Judgment
9.1 Each of the judges of the Court of Appeal delivered judgments. Ryan P. concluded first, not without some reservations on his part, that it was appropriate to treat the Agreement as purely commercial albeit with what he described as very special, almost unique, features. Ryan P. suggested that clause 4.1.1 clearly covered the case of insurer insolvency but identified what he considered to be a more difficult question being whether that interpretation could be said to have been negatived by other aspects of the Agreement. While accepting that some of the other features (in particular clause 3(11)) might tend to negative the broad interpretation of clause 4, Ryan P. was of the view that the very breadth of the terminology found in clause 4 was sufficient to rebut any ambiguities arising from other clauses.
9.2 Ryan P. went on to suggest that the historical context of the collapse of Equitable and the enactment of the 1964 Act provided further support for the conclusion that insurer insolvency was covered by clause 4.1.1 and indicated his view that such a construction would not be at odds with commercial sense or general business efficacy.
9.3 Finlay Geoghegan J. took a similar view in placing significant reliance on what she saw to be the clear wording of clause 4.1.1. Finlay Geoghegan J. also noted the issue, touched on earlier in this judgment, as to whether an insured who became liable to the MIBI as a result of a claim against him by an injured party being assigned to the MIBI would be entitle to recover out of the Fund at least to the limits which the legislation provides.
9.4 Hogan J. also placed significant reliance on what he found to be the clear wording of clause 4.1.1 and found the arguments put forward on behalf of the MIBI for suggesting that the clause in question did not clearly cover insolvent insurers’ cases to be “ultimately unconvincing”. Hogan J. also came to a similar view to that of Ryan P. in regarding the all embracing nature of the wording of clause 4.1.1 as being sufficient to rebut any arguments deriving from other clauses in the Agreement. Hogan J. did not consider the commercial reality argument as being persuasive not least because of the statutory obligation imposed on insurance companies to fund payments required to be made out of the Fund. In that regard Hogan J. also placed reliance on the policy argument to the effect that the purpose of the Agreement was to ensure that persons injured by the negligence of others would receive full compensation.
9.5 While each of the three judgments of the Court of Appeal addressed certain additional issues it seems clear that the overall rationale of that court was that the wording of clause 4.1.1 was clear and strong in its terms such that it was sufficient to overbear any of the additional arguments put forward on behalf of the MIBI in favour of its alternative construction.
10. The Law
10.1 As noted earlier there was little disagreement between the parties as to the appropriate principles to be applied in construing the Agreement. The one possible exception was the suggestion put forward on behalf of the Law Society to the effect that the fact that the Agreement has, on their case, a public law element may have some implications for its proper interpretation.
10.2 This Court has, in Analog Devices BV v. Zurich Insurance Company [2005] 1 I.R. 274, confirmed that the modern approach to the construction of contracts in this jurisdiction is similar to that applied by the courts of the United Kingdom as developed in cases such as Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 W.L.R. 896.
10.3 However, in the light of the issue raised concerning the possibility that the Agreement might be said to have a public law element which might influence its proper interpretation, it may be appropriate to attempt to identify the underlying principle behind the proper approach to the interpretation of documents which are designed to affect legal rights and obligations.
10.4 The modern approach has sometimes been described as the “text in context” method of interpretation. It might be said that the older approach in the common law world placed a very high emphasis indeed on textual analysis without sometimes paying sufficient regard to the context or circumstances in which the document in question came into existence. On the other hand it is important not to lose sight of the fact that the document whose interpretation is at issue forms the basis on which legal rights and obligations have been established. That is so whether the document in question is a statute, a contract, the rules of an organisation, a patent or, indeed, any other form of document which is designed, whether by agreement or unilaterally, to impose legal rights and obligations on either specific parties or more generally. To fail to have sufficient regard to the text of such a document is to give insufficient weight to the fact that it is in the form of the document in question that legal rights and obligations have been determined. However, an over dependence on purely textual analysis runs the risk of ignoring the fact that almost all text requires some degree of context for its proper interpretation. Phrases or terminology rarely exist in the abstract. Rather the understanding which reasonable and informed persons would give to any text will be informed by the context in which the document concerned has come into existence.
10.5 Perhaps it is fair to say that the main underlying principle is that a document governing legal rights and obligations should be interpreted by the courts in the same way that it would be interpreted by a reasonable and informed member of the public who understands the context of the document in question. Such a person would, necessarily, pay a lot of attention to the text but would also interpret that text in its proper context.
10.6 With one exception it seems to me that the detailed rules specified in Investors Compensation Scheme can be seen as being derivative from that general “text in context” approach. The exception is the fact that prior negotiations or drafts are not regarded as forming an appropriate part of the context by reference to which the text is to be interpreted. As pointed out in many of the authorities, to take that approach is to deviate from the approach which a reasonable and informed member of the public might take. However, there are sound reasons of policy, which it is unnecessary to repeat here, for adopting that approach. Indeed even the contra proferentem rule, as discussed in the context of Investors Compensation Scheme by O’Donnell J. in ICDL GCC Foundation FZ-LLC & Another v. European Computer Driving Licence Foundation Limited [2012] IESC 55, can be seen as an application of the underlying principle. The reasonable and informed person would be likely to assume that an individual who wished to insert a clause into a contract specifically for their own protection or benefit would ensure that the clause was expressed in clear terms. It would follow that, provided that the terms were clear and that there was no ambiguity, the clause should stand and provide whatever protection its terms permitted. However, if the clause were unclear and an ambiguity existed, then the clause should be construed against the profferer for the reasonable and informed observer would be likely to take the view that, if greater protection or benefit had truly been agreed, the profferer would have ensured that it was clearly specified.
10.7 It is also appropriate to take into account the fact that part of the overall context requires a consideration of the nature of the type of document which requires to be interpreted. It has again often been said that part of the reason for conferring a significant weight to the text actually used is that we do not expect persons to make mistakes or use loose language in important documents. Similar considerations would apply with the same, or perhaps even greater, force in the case of legislation or the like. On the other hand documents such as planning permissions have been held to be properly interpreted by reference to the way in which they might be interpreted by an ordinary person concerned with either proposing or opposing a development. As per the judgment of McCarthy J. in In Re XJS Investments [1986] I.R. 750, such documents are not to be construed in the same was as, for example, documents of title. Furthermore, many types of formal legal documents are written in a traditional language typically used for documents of the type in question and this itself forms part of the context.
10.8 I would emphasise, however, that, in my view, it is possible, particularly in the case of formal agreements negotiated carefully by experienced players often with significant legal and other advice, to overdo context. I fully agree with the insight of Lord Hoffman, as noted by O’Donnell J. in his judgment in this case, that, in a family context, words may often have a clear meaning which would be understood by all within the family but where that meaning differs radically from the meaning which any external party might place on them. An umbrella is an umbrella and an apron is an apron but it may be that, in the context of certain families one may mean the other. I must confess to a standing joke in my own family which requires persons to be asked to post a letter in a phone box.
10.9 But as already noted a most important part of context is the nature of the document concerned. In Investors Corporation itself the point is made that we do not readily accept that people make mistakes in carefully drafted and important documents. If the failing which the modern jurisprudence sought to address was over-reliance on textual analysis then there is a danger, at the other extreme, in an over-reliance on context or subordinate parts of agreements. Important legal documents are drafted in particular ways. They have clauses which specify the primary liabilities and obligations of the parties. While one should always look at the agreement as a whole and should always look at the context in which the agreement is reached one should not unduly downplay the importance of the words in which the primary rights and obligations of the parties have been defined. To do so would be to elevate context and subordinate clauses above primary text which would, in my view, be just as great a mistake as the previous practice of elevating text above context. Lord Hoffman’s observations might make perfect sense in a family setting but it would require very special circumstances to interpret the word “umbrella” as meaning “apron” in a carefully drafted legal contract.
10.10 It is on that basis appropriate to at least have some regard to the nature of the Agreement. While it is, in substance, an agreement between the Minister and the MIBI it is, of course, designed not to benefit the Minister directly but rather to give effect to the Minister’s policy desire to ensure that there should be appropriate compensation for those who can establish that they were injured in motor accidents as a result of the negligence of others.
10.11 It follows that the appropriate approach to be adopted in construing the Agreement is to consider the text but in its context giving appropriate weight to both. Part of that context is the nature of the document whose construction is at issue. In the circumstances of this case the relevant context is that it is a long term agreement between the Minister and the MIBI which is designed to provide benefits for third parties being those who are injured in cases covered by the Agreement.
10.12 Before going on to apply that general approach to the issue of construction which arises in this case it is, perhaps, worth making one additional point by way of background to the task with which the Court is faced in a case such as this where what is in dispute is the construction of a long term agreement.
10.13 It might well be said that agreements which are designed to last over a long period of time can often give rise to greater questions of construction or difficulty than one-off contracts. The reason for this is that courts are often called on to apply such contracts to developing situations which may not have been contemplated, or at least not contemplated in the same way, at the time when the contract was originally entered into. However, it is an occupational hazard of long term agreements that they may have unintended consequences when the circumstances to which the contract applies change over time.
10.14 A simply example might be to touch on long term commercial leases. Those who remember the situation which emerged in the late 1960s and 1970s will be aware that significant litigation occurred at that time which stemmed from the fact that the standard form of commercial lease then used was typically for a term of 21 years without rent review. In times when inflation reached a level which had not previously been anticipated, landlords were faced with a situation where the rent which they were receiving in real terms fell considerably while tenants had the benefit of what might have been felt to have been a windfall gain.
10.15 On the other hand, in the immediate aftermath of the onset of the great recession, the boot was on the other foot. By that time rent review clauses had become the norm and it was almost always the case that such rent reviews were on a so-called “upward only” basis. It followed that, with a very significant collapse in the going rate for rents, tenants found themselves paying a lot more than the market would have suggested and landlords had the benefit of what many might have regarded as windfall gain.
10.16 This demonstrates that long term contracts, which might have appeared to have been relatively evenly balanced between the benefits and obligations of both sides at the time when they were entered into, can turn out to favour or disadvantage one side or the other because of a change in circumstances. It is all the more important, therefore, that care be exercised by all parties entering into long term arrangements to ensure that they include means of amendment or, indeed, the potential to escape from the arrangements, so as to cover unexpected eventualities. Those who enter into long term arrangements without such provision inevitably must be taken to have accepted a risk. Those who, as the parties to the various MIBI agreements did, revise their contractual arrangements from time to time also need to have regard to any change in circumstances then present or anticipated and to make sure that the text of any amended agreement entered into covers such situations.
10.17 Any failure so to do runs the risk of the sort of unintended consequences which I have sought to identify. Against that backdrop I now turn to a discussion of the core issue of construction which arises in this case.
11. Analysis
11.1 It seems to me that, in the circumstances of this case, it is appropriate to start with the text of the Agreement while of course keeping in mind that context needs to be considered in construing that text. In my view the Law Society was correct to argue that clause 4.1.1 of the Agreement can properly be described as the central provision governing the liability of MIBI. It is in that form that the primary obligation of the MIBI has been defined. It is important to acknowledge that the terms of clause 4.1.1 are conditional for there is a reference to the clause applying “subject to the provisions of this Agreement”. However, and subject to that important caveat, the primary obligation of the MIBI under the Agreement as a whole, which is to be found in that clause, is to “pay … to the person … in whose favour such judgment was given any sum payable … in respect of the aforesaid liability …” The reference to “such judgment” is a reference to an unsatisfied judgment in a case covered by compulsory insurance. Thus the structure of the Agreement is that it relates to unsatisfied judgments (or, in more recent versions, Injuries Board orders). It is in that form that the parties have chosen to define the legal obligations arising under the Agreement. In its terms that clause does not specifically relate to uninsured drivers as such but rather relates to cases covered by compulsory insurance where there is a judgment or Injuries Board order which has not been satisfied.
11.2 It is also of some importance to note that the clause is said to be applicable “whether or not such person or persons be in fact covered by an approved policy of insurance”. Taken at face value the text of clause 4.1.1 would seem to apply even to a case where the defendant against whom an order had been made was insured by a solvent insurance company but, for whatever reason, that insurance company had not discharged the judgment in question within 28 days from the time when the judgment became effective.
11.3 It is, of course, necessary to point out that such a narrow textual analysis is not necessarily decisive. Even if the clause itself was not qualified by the express provision that it is subject to the other terms of the Agreement, a pure reliance on textual analysis would not accord with the modern approach to interpretation of legally binding documents. However, it remains the case that clause 4.1.1 is an important starting point. The parties could have chosen, if they wished, to define the obligation of MIBI in express terms by reference to uninsured drivers. There are, indeed, references to uninsured drivers to be found elsewhere in the Agreement. However, the parties chose, from the very beginning, to define the obligation of the MIBI by reference to unsatisfied judgments in cases covered by compulsory insurance rather than by reference to the relevant defendant being uninsured and, indeed, arguably did so in a manner which expressly suggests that the obligation arises whether or not the relevant defendant was insured.
11.4 On that basis I am satisfied that the Law Society were correct to argue that clause 4.1.1 potentially covers a situation such as that which lies at the heart of these proceedings being a case where a relevant defendant was insured by an insurer who has become insolvent. Given that that clause represents the primary definition adopted by the parties to specify the circumstances in which the MIBI is to be liable, it seems to me to follow that the real question is as to whether there is anything to be found either elsewhere in the Agreement or in the general context surrounding the Agreement and its predecessors which might lead to a different interpretation being placed on clause 4.1.1 other than that which might derive from a purely textual analysis of that clause. It is in that context that it is necessary to turn to the various arguments put forward by the parties both in favour and against the proposition that the Agreement as a whole needs to be construed in a way different from that which a textual analysis of clause 4.1.1 might suggest.
11.5 The first such point that needs consideration is the argument put forward on behalf of MIBI which suggests that the phrase providing for liability on the part of MIBI, in clause 4.1.1, which refers to that liability arising whether or not the relevant person was actually insured, was intended to cover the case of an insured who held a policy of insurance at the time when the relevant accident occurred but where the insurer in question validly repudiated the policy of insurance thereafter. It is certainly the case that the phrase in question makes clear that that the MIBI would have to cover a person who had a potentially valid policy of insurance at the time of an accident but where the relevant insurer became legally entitled to repudiate. Such a situation could, of course, apply either in circumstances where events predating the accident, such as the proposal for insurance and the information supplied with it, were deficient in a manner which would entitle the insurer to repudiate or where the insured, post accident, committed a breach, such as failure to cooperate with the insurer in an appropriate way, which would also justify repudiation.
11.6 I would attach some weight to that argument for it does provide a possible explanation for the inclusion of the phrase in question which is not inconsistent with the MIBI’s case. On the other hand it does have to be said that there is nothing in the text of clause 4.1.1, or indeed any surrounding documentation or materials, which suggests that the proviso contained in that phrase is confined to cases where there was a policy of insurance which is validly repudiated. On the contrary, read in its natural way, the clause seems to cover any failure to discharge a judgment whether or not there is a policy of insurance in place. In those circumstances the weight to be attached to the MIBI’s argument on this point seems to me to be quite limited.
11.7 Before leaving this aspect of the debate it is also important to recall, as the Law Society argued, that both the Agreement and the original agreement specified that the relevant liability is to arise “whatever may be the cause of the failure of the judgment debtor to satisfy same”. Here again MIBI argue that that phrase was not intended to expand the obligations arising under the Agreement to all cases where there was a failure to pay but rather was intended only to deal with all cases which come within the ambit of the Agreement. Again I think it is fair to say that the phrase in question lends weight to the Law Society’s argument for it is, in its terms, unqualified and does not appear to confine itself in any particular way.
11.8 Next it is necessary to turn to the various conditions precedent set out in the Agreement which the MIBI argues are strongly suggestive that the Agreement as a whole should properly be construed as only applying to uninsured drivers. The relevant conditions have already been cited and relate to matters such as cooperation with An Garda Síochána in investigations, reports to the Garda and attempts to establish the existence of a policy of insurance.
11.9 It is clear, from the case law already cited, that compliance with those conditions precedent is, as a matter of law, a mandatory requirement for liability to be imposed on MIBI. It also seems that compliance with at least some of those clauses would be of little relevance in the case of a claim against an insured whose insurer had become insolvent. In such a case there would undoubtedly have been an apparently valid policy of insurance in place and thus Garda investigations and the like into the insurance status of the defendant would not be very relevant.
11.10 However, it seems to me that the point made by the Law Society in response to that argument is of considerable significance. It will be recalled that the explanation given by MIBI for the inclusion of the phrase concerning whether or not there was an insurance policy in place was that that phrase was intended to cover cases where the insurance policy in question was validly repudiated. Indeed, it seems to me that the MIBI would have been in some very considerable difficulty in having any cogent answer to the Law Society’s interpretation of clause 4.1.1 without that argument. But the conditions precedent on which reliance is placed under this heading would equally be of little practical application in the case of a repudiated policy. The insured would have had a policy of insurance, apparently valid, at the time of the accident. There would, for example, be no requirement to investigate the existence of the policy for it would be clear that it did exist with the only issue being whether it had subsequently been validly repudiated.
11.11 Given that it is accepted, as it would have to have been, that the MIBI agreement undoubtedly covers repudiated policies of insurance then it is hard to see how any great weight can be attached to the argument based on those condition precedents. Some of the conditions precedent may have limited, or indeed no, application in particular circumstances. While compliance is mandatory, compliance can only be required where the issue sought to be covered by the condition precedent is of some arguable relevance. It does not seem to me that compliance with those conditions precedent concerning matters such as investigation of insurance policies will, ordinarily, have any relevance in the case of at least some repudiated policies. It follows that there are at least some cases where compliance with the conditions precedent will not, in practise, arise. It follows in turn that the fact that the same or similar conditions precedent may be of limited or no relevance in the case of an insolvent insurer is of relatively little weight in construing the Agreement as a whole.
11.12 Before leaving the issue of the conditions precedent it is important to comment on the argument between the parties as to the extent to which it might be said that article 3, concerning conditions precedent, or indeed any other articles, could override what is said to be the clear wording of clause 4.1.1. I do not doubt that there can be circumstances where, notwithstanding the clear wording of what might be said to be the principal operative clause in an agreement, a proper construction of the agreement as a whole and in its context might nonetheless lead to a conclusion which differed somewhat from that which might be reached by simply considering the text of that principal clause. However, in relation to such an argument I think it is important to emphasise that particular weight should be given to the structure of any agreement and in particular the principal way in which the parties have sought to set out their main obligations and entitlements. It would, in my view, require something quite significant in terms of other provisions in the Agreement or of the general context, to displace what might otherwise be taken to be the natural meaning of clause 4.1.1. To take any other view would be to significantly undervalue the text of a central clause of a carefully drafted and important agreement. It would be to overvalue context and subordinate clauses.
11.13 I am not satisfied that there is anything in clause 3, or indeed in any of the other clauses of the Agreement, which so clearly points in the opposite direction so as to displace the basic structure of what was agreed not only in the Agreement but in all its predecessors. In each of those agreements the insurers and the Minister defined the primary terms of the MIBI’s liability by principal reference to unsatisfied judgments rather than specifically by reference to the uninsured status of the defendant in question.
11.14 Finally, in the context of the terms of the Agreement, it is of importance to address the argument put forward on behalf of the MIBI which places reliance on the terms of the preamble which suggest that the purpose of the Agreement is to provide for compensation for victims of road accidents “ involving uninsured or stolen vehicles and unidentified or untraced drivers ”. The MIBI argues that this provision of the preamble makes clear that the overall intent of the Agreement was that it was to be confined to providing for compensation to a limited class being those injured by the negligence of the various categories of drivers specified. I think it has to be said that, at a minimum, a tension exists between the text of the preamble and the provisions of Clause 4.1.1. As noted earlier, Clause 4.1.1 does not, certainly in express terms, contain any restriction which confines liability to a limited class of the type specified in the preamble. That tension is a matter to which it will be necessary to return.
11.15 In the light of that analysis of the Agreement it is next necessary to consider the various other documents, materials or external circumstances which were urged by the parties as having some relevance to the proper construction of the Agreement.
11.16 I should first turn to the arguments put forward by both sides which suggest that the interpretation proffered by their opponent would lead to anomalies. For the reasons identified earlier in this judgment, it seems to me that there may be some merit in what both sides say in this regard. The concern expressed by the MIBI related to the position of a person who held a policy of insurance with Setanta and who was the subject of a successful claim. As already noted, it is part of the MIBI scheme that the MIBI becomes entitled to enforce any judgment obtained by a relevant plaintiff in the event that the MIBI discharges the liability under the judgment concerned. Prima facie there would, indeed, appear to be what might be described as at least a material risk that the burden of discharging the judgment in favour of the injured party might ultimately fall, to the extent that it might be enforceable in practice, on the driver whose negligence caused the accident in question. Certainly the ordinary operation of the MIBI Agreement would lead to the MIBI obtaining the benefit of any judgment against that driver. Precisely what the position of that driver might be thereafter was the subject of some debate but it is not, in my view, possible to resolve such questions in this case.
11.17 For the reasons noted earlier it is at least arguable that a driver in such a situation might be in a position to obtain from the Fund at least some of the monies which were owed to the MIBI (subject to a cap and a limitation of 65%). If that turns out to be the case then such a driver would only be exposed to the extent of either 35% or the balance over the cap. But, on the basis of the MIBI construction of the Agreement being correct, the same driver would be exposed in exactly the same way in any event. This is so because the Fund would only cover the injured party’s claim to the same extent and the injured party would be entitled to seek the balance directly from the driver. On that view there may, in fact, be no anomaly for the driver would have the same exposure in either event.
11.18 Suffice it to say that such a driver would be exposed to some extent should they prove to be a mark. Given that the driver concerned would not be at fault, for they would have held a valid policy of insurance at the time of the relevant accident, this might be seen as anomalous although, of course, the driver would have to have been negligent for any liability to arise in the first place. On the other hand any non-motor insured, who happens to have a liability to a third party but whose insurer becomes insolvent, will also be exposed to meeting at least part of the claim. While there are undoubtedly policy considerations which suggest that innocent injured parties should be fully compensated, it would appear to be the policy of the Fund legislation that relatively innocent insured may nonetheless have to meet part of a relevant claim, perhaps to discourage a race to the bottom in the insurance business.
11.19 The point made on behalf of the Law Society on anomalies is, however, undoubtedly valid and arguably much clearer. If persons injured due to the negligence of drivers insured by Setanta must look to the Fund for compensation then there is no doubt that there will be limitations on the amount of damages which they can recover in practice. It would again seem highly anomalous that, having put in place extremely detailed provisions to ensure that persons injured in road traffic accidents through the fault of others should actually be able to recover full compensation, it would transpire that those unlucky enough to be injured by the negligence of a driver, who had a policy of insurance but where the insurance company concerned proved to be insolvent and the driver not a mark, would be placed at a significant disadvantage over another injured party who happened to be injured due to the negligence of a completely uninsured driver.
11.20 Given the clear underlying policy behind the MIBI Agreements from the beginning and, indeed, the European law obligations of the Minister to ensure compensation in appropriate cases, such a consequence would undoubtedly be anomalous.
11.21 However, there may be anomalies either way. Why is this so? It can only be because, prior to the collapse of Setanta, none of the relevant parties really sat down and thought through how things were to work in the case of a significant insolvency of a motor insurer. If they had then surely the range of anomalies which were canvassed in argument before this Court would have been considered and express measures, whether statutory or in the context of amendments to the MIBI Agreements, would have been put in place to deal with those anomalies. The fact that this did not happen means that there may be anomalies whatever the decision of this Court. But this Court cannot rewrite either the law or the MIBI Agreements. Whichever way this Court decides this appeal there may be anomalies and persons will have to bear the burden of that situation. But it is not within this Court’s power to prevent that situation. Those who could have prevented it did not address the situation prior to the insolvency of Setanta and the Court is left with no choice but to take the situation as it stands with whatever consequences follow. It is, of course, the case that part of the context which can properly be taken into account in the construction of a legally binding document may be potential anomalies which would arise from its construction in any particular way. The notional reasonable and informed person would undoubtedly lean against interpreting the intention of the parties as creating significant anomalies at least if there was an alternative construction available which would prevent any such anomaly arising. However, I am not sure, given that there may be anomalies either way, that the fact of those anomalies can be taken to influence to any material extent the proper construction of the Agreement in this case.
11.22 I propose next to take a number of further questions together. The first is the argument on business efficacy relied on by MIBI. The second concerns the implications, if any, from the actions taken after the Equitable collapse. A third stems from the fact that no amendments were introduced into the MIBI agreement at the time when the Fund came into existence.
11.23 The business sense argument is relatively straightforward. It is argued on behalf of the MIBI that the effect on competitors of a requirement in substance to underwrite the liabilities of an insolvent motor insurer (which would result from the Court adopting the interpretation on the Agreement argued by the Law Society) would not make business sense. It was accepted, of course, that a business sense argument cannot override the clear wording of a contract. However, it was said that the Agreement is sufficiently unclear and imprecise to make it appropriate for the Court to have significant regard to the business sense argument.
11.24 There were, perhaps, two legs to the argument that it would not make business sense to underwrite the liabilities of an insolvent competitor. First it was said that the potential or contingent liabilities which might thereby arise were potentially very substantial indeed and that, being insurers, each motor insurer who is party to the MIBI arrangements would have to consider how properly to make provision against such a possible liability. It is, of course, the case that all insurance is about risk. Insurers seek to assess the risk involved in offering any particular type of insurance and attempt to fix the premium accordingly. There can be little doubt but that the clear obligation of motor insurers in Ireland to contribute to the MIBI must properly be taken into account by each insurer in their overall assessment of potential liabilities. Outside the ambit of the MIBI, insurers in the non-motor aspect of the market must assess the liabilities which may arise on their own policies. That may or may not prove to be a difficult task. Some types of eventualities can, doubtless, be predicted with reasonable accuracy. Others may be more sporadic such as the substantial liabilities which may arise for those offering household insurance policies in the event of extreme weather conditions affecting many policy holders.
11.25 While acknowledging that having to provide funding to compensate those injured by the negligence of uninsured drivers provides an added level of difficulty for those involved in the motor insurance business, it is argued that it is at least possible to make some reasonable estimation as to the likely burden arising from the commitments which motor insurers make to the MIBI. In substance the MIBI can, perhaps, suggest that, while it may not be possible to estimate the precise amount of money which insurers will have to contribute to the MIBI in each year, the overall exposure is no more likely to fluctuate wildly from year to year than the exposure which will arise under each insurers own policies. It is said, however, that taking on the burden of potentially having to meet the liabilities of a, possibly very substantial, insurer who becomes insolvent would give rise to a level of potential liability which would be both very difficult to assess or to make provision for. On that basis it is argued that a court should lean against an interpretation which places such a burden on the relevant insurers unless the terms of the agreement imposing that liability are clear.
11.26 In the same context some reliance is placed on the regulatory obligations of insurers concerning adequate provision. In addition it is said that an obligation to cover the liabilities of an insolvent insurer would give rise to significant market difficulties. On that argument it is suggested that it is more likely that an insurer will become insolvent if it adopts imprudent policy writing or premium fixing practices. Such practices may, at least in the short-term, secure additional business which may, at least in part, be at the expense of the very competitors who may have to cover the liabilities of the imprudent insurer should it become insolvent. It is said that this again is the type of consequence which the Court should lean against unless the relevant contractual arrangements clearly imposed it.
11.27 There is certainly some merit in those arguments. Accepting an obligation to meet the liabilities of competitors who become insolvent has potential significant adverse consequences for those in the motor insurance business along the lines identified. Those consequences are certainly a factor which the Court should take into account as a result of which the Court should scrutinise the relevant contractual arrangements to ensure, if it be the case, that they truly do impose an obligation of the type concerned. This is a matter to which I will return at the end of this analysis.
11.28 However, in the same context the Law Society raises the question of what actually occurred after the Equitable collapse. As noted earlier there is clear evidence that the MIBI actually discharged the liabilities of Equitable when it became insolvent. As the events are quite some time ago there is, understandably, something of a lack of very clear evidence about the legal basis on which MIBI discharged those liabilities. It is suggested, although the evidence is extremely limited in this regard, that the payments might have been made on an ex gratia basis. On the other hand the Law Society draws attention to the fact that the insurers at the relevant time were asked, but declined, to extend MIBI cover to other cases thus, by inference, being prepared to rest on their legal obligations.
11.29 That leads to perhaps a further important point which was the subject of some debate in the argument before this Court. Obviously at the time when the original MIBI Agreement was put in place and at the time of the Equitable collapse, the Fund did not exist. While there have been some changes in the text of the MIBI agreements over time, I think it is fair to say that the core provision which lies at the heart of the dispute in this case has not significantly altered at least insofar as it relates to the issues which this Court has to decide. In particular there was no alteration brought about as a result of the creation of the Fund. In the light of the fact that MIBI had, in fact, compensated those injured by the negligence of drivers covered by Equitable, and in the light of the fact that, thereafter, the Fund came into existence, it might have been thought that the relevant agreement would be amended to make clear, if it was indeed the case that such was what the parties wished, that the Fund was now to be the resort of those injured by the negligence of drivers who held policies with an insolvent insurer. No such amendment in fact occurred. It seems to me that, while there is undoubtedly some weight to be attached to the business sense argument put forward on behalf of MIBI, the absence of any amendment at the time when the Fund came into existence must also be taken into account in any overall assessment.
11.30 Before leaving the business efficacy argument it is also appropriate, in my view, to touch on the question of the notes to the financial statements of the MIBI to which reference has already been made. I will deal with the specific arguments raised under that heading later in this judgment. However, it seems to me that those notes are of particular relevance in the context of the business efficacy argument. It is true, of course, that the unilateral view of one party is not relevant to the construction of an agreement. Agreements are to be construed objectively. However, it seems to me that the established view of a party can be of some relevance in considering the weight, if any, to be attached to a business efficacy argument. The whole point of such an argument is that it is said that a particular construction should not be favoured because it should be assumed that a reasonable business person would not have entered into an agreement which was contrary to business sense. Such an argument is normally made by a party who asserts that, from its perspective, an agreement construed in a particular way would not have made sense and that it should be implied that the party would not have entered into such an agreement unless the text is clearly to the contrary. But if the very party whom it might be said would not have entered into an agreement of a particular type can be shown to have believed that it had entered into an agreement of that very type, then such an argument is, in my view, significantly undermined. I say that notwithstanding the fact that events occurring after a contract has been concluded cannot ordinarily be used to construe the meaning of the contract at the time it was entered into for that exercise again has to be conducted on an objective basis and in the light of the circumstances prevailing at the time in question. However, if it truly is to be said that it would not have made business sense for the MIBI (and the insurers who are members of it) to have agreed to cover the liabilities of an insolvent insurer then it is surely highly surprising that they appear to have believed, for a significant number of years leading up to the Setanta collapse, that they had done just that. If it would have been so contrary to business sense to have entered into such an agreement then it is surprising in the extreme that the MIBI actually thought that it had done so.
11.31 It is next necessary to turn to the arguments put forward by both sides which derive from the statutory provisions concerning the fund. The Law Society places reliance on the terms of s.3(7) of the 1964 Act which provides that payment should not be made out of the Fund where a payment has been made by the MIBI. It is suggested that this implies that the MIBI is to be the primary source of compensation in cases of insolvency in the motor insurers’ industry. However, the MIBI argue, correctly in my view, that s.3(7) could not impose a liability on the MIBI where one did not exist in the first place under the Agreement.
11.32 There was some debate concerning the legislative history of the relevant provisions of the 1964 Act as amended from time to time which arose in the context of the argument put forward by MIBI that the only purpose of s.3(7) was to prevent a double payment. In that context the Law Society drew attention to the fact that s.4 of the 1964 Act permitted the Minister to make payments to the liquidator of Equitable. That provision might, it was accepted, provide an initial explanation consistent with the predecessor of s.3(7) being intended to prevent double compensation. However, the Law Society went on to note that s.3(7) is, in its current form, a re-enactment of s.3(4) of the original legislation. That re-enactment occurred in 2011 and, it is said, clearly correctly so far as it goes, could not have in any way been related to the Equitable collapse over half a century earlier. In that context the MIBI suggested that there could be, admittedly rare, circumstances where there might be a risk of a double payment where there was a change in circumstances after a payment out by the MIBI which might, theoretically, lead to a potential claim on the Fund were it not for s.3(7).
11.33 While there was much interesting debate concerning the provisions of the 1964 Act, in its various forms, which concerned the Fund, I have come to the view that the legislation cannot have any proper bearing on the proper interpretation of the Agreement. I could well see that if the Agreement had been specifically amended in the context of the introduction of the Fund, the new legislative backdrop which would have arisen at that time would undoubtedly have formed part of the context by reference to which the text of the relevant agreement as amended would need to be interpreted. The legislative context in which any agreement is entered into can clearly form a part, and frequently an important part, of the context which must be taken into account in analysing the text. This will be particularly so where the agreement is entered into with the State.
11.34 However, I am not convinced that legislative provisions or changes can play quite such an important role in the proper interpretation of a pre-existing contract unless the terms of the contract itself are such that their proper interpretation is necessarily altered by legislative change. In that latter context it is easy to envisage a case where, for example, a contract stipulates that a service provider is to comply with all relevant regulatory requirements in providing the service in question. Clearly a change in the regulatory regime would affect such a contract without any amendment being required. There might, in such a context, be difficult questions of construction where the new regulatory regimes seemed to be in conflict with, or to create difficulties of interpretation in relation to, other provisions contained in the same contract. Doubtless other examples could easily be given. I would wish to emphasise, therefore, that I do not consider that an agreement cannot be held to change its proper meaning by reason of the knock-on effect of legislative change. However, the fact that there is no amendment as a result of legislation may be part of the factual matrix which provides context for the construction of the Agreement. For present purposes I would confine myself to holding that the legislative history of the Fund for the purposes of this case could not have any proper bearing on the true construction of the Agreement.
11.35 I next propose to deal with two arguments put forward by MIBI which, in reality, concern documentation internal to that company and the motor insurers who are members of it. It is argued that certain aspects of the Memorandum and Articles of Association of the MIBI and the internal arrangements entered into between the MIBI and the individual insurance companies for distributing the burden of the liabilities of the MIBI (including the so-called “insurer concerned” provisions) are consistent with MIBI’s interpretation of the Agreement. I am not convinced that any significant weight can be attached to these arguments. They may, or may not, reflect a certain view by the MIBI and its motor insurer members as to the proper interpretation of the Agreement. Clearly the internal constitutional documents of the MIBI are a matter for it and the arrangements which the various insurers enter into between themselves for distributing the burden of complying with the MIBI’s obligations are again a matter for those insurers. Doubtless, in formulating those measures, each had regard to its own understanding of the scope of the obligations which the MIBI might have to undertake. But as such they could do no more than establish the subjective view of one party as to what the Agreement means. While various relevant Ministers, or officials in the relevant departments, may or may not have been aware of some or all of the detail of those internal MIBI measures at various points in time, it does not seem to me that there is any legitimate basis for suggesting that any of those measures could properly form part of the context which might legitimately affect the proper interpretation of the Agreement.
11.36 For like reasons I am not convinced that the contents of various notes contained in MIBI accounts, which seem to imply a belief on the part of the MIBI at certain stages that it did have a liability in the case of an insolvent insurer, carry any significant weight in themselves. These again reflect the subjective view of one party to a contract. I have already dealt with the impact of those notes on the business efficacy argument.
11.37 Indeed, even insofar as any weight might be attached to the various internal documents of the MIBI referred to, same cut both ways for the MIBI is able to point to aspects of its Article and Memorandum of Association and the internal agreement between the insurers which might be said to support its construction while the Law Society can point to the notes to which I have just referred to the opposite effect.
11.38 But more fundamentally it seems to me that one of the consequences of the underlying principle to be applied in the construction of legally binding documents, which I have already sought to identify, is that the test is an objective test and little will normally be gained by attempting to identify the subjective views of the parties as to what the contract means.
11.39 There may, of course, be cases where something in the nature of an estoppel might arise in circumstances where parties have acted in a way which demonstrates an acceptance on both their parts that an agreement should be given a particular construction. This will be particularly so in the context of long-term agreements. The fact that an objective interpretation of the contract might lead to a different result may be displaced by a party being estopped from relying on that objective construction if they have acted in a way which would reasonably lead the other party to believe that a particular interpretation was accepted all round. However, given that the internal documentation of the MIBI points in both directions and the rather unusual nature of this contract being one where the persons who may benefit are not actually parties to the contract at all, I am not persuaded that any question of estoppel could arise.
11.40 In similar vein it does not seem to me that the attempt by the MIBI to suggest that the Minister necessarily agreed with the MIBI’s construction of the Agreement is either properly made out or, in any event, of any particular relevance. If it could have been demonstrated that, prior to the collapse of Setanta, both the MIBI and the Minister had acted in a way which made clear that they both accepted that the Agreement did not extend to the case of an insolvent motor insurer, then things might be different but there was no evidence in that regard.
11.41 Therefore, I have come to the view that, as in the case of the possible effect of the 1964 Act on the proper construction of the Agreement, the various matters internal to the MIBI which I have sought to analyse do not provide any assistance either.
11.42 Finally, it is necessary to make some brief reference to the United Kingdom case law. I am not convinced that any very great assistance can really be obtained from the case law relied on. It is true that there are certain observations in the judgments already cited which seem to imply a view that the United Kingdom MIB Agreement may be taken to cover cases involving insolvent insurers. However, it does appear that the MIBI are correct to argue that the issue was not squarely before any of the courts on the relevant occasions. In addition it is clear, as the argument and analysis set out in this judgment hopefully demonstrates, that much of the debate in this case is dependent on the precise terms of the Agreement. Unless there were United Kingdom authorities which made clear that the court in question was addressing the precise issue of interpretation with which this Court is concerned and where the terms sought to be interpreted were the same as, or at least not materially different from, those in the Agreement, it is doubtful if any great weight could be placed on those United Kingdom authorities.
11.43 Having analysed the various arguments put forward it is necessary to summarise the conclusions on the individual elements of the argument for the purposes of determining an overall conclusion on the issue before the Court.
12. Discussion
12.1 The starting point has to be to note that there is at least some ambiguity to be found in the Agreement. For the reasons analysed earlier I am satisfied that Clause 4.1.1, taken by itself, is very clear in its terms and includes an obligation on the MIBI to provide compensation in the case of an insolvent insurer. I am not convinced that the argument based on conditions precedent really creates any ambiguity or provides any basis for an alternative construction to be placed on Clause 4.1.1. However, the stated purpose of the Agreement in the preamble seems to me to be potentially inconsistent with Clause 4.1.1 and it follows that there is, at least to that extent, an ambiguity.
12.2 While accepting that an interpretation which may give rise to an anomaly can be a factor, at least in some cases, to be taken into account in the proper construction of a legally binding document, I am not, for the reasons set out earlier, convinced that the anomalies pointed to in this case can affect the proper construction of the Agreement. The reason why anomalies may be relevant is that the hypothetical reasonable and informed person would lean against an anomalous interpretation unless the wording was clear such that no alternative meaning could be implied. However, here the anomalies may cut both ways and, in my view, the reasonable and informed person would be faced with the task of accepting that, whatever interpretation is to be placed on the Agreement, it is possible that anomalies will occur. On that basis I am not satisfied that the anomalies can have any significant material effect on the proper construction of the Agreement.
12.3 Also for the reasons already set out I am not satisfied that the 1964 Act and its various amendments can play any significant role in the proper interpretation of the Agreement not least because no amendment took place to the Agreement at the time when the Fund was first created.
12.4 I have concluded that there is some merit in the business sense argument put forward on behalf of MIBI but would question the weight to be attached to that argument not least because of the fact that it would have been easy for the parties, after the Fund had come into existence, to have amended the Agreement to make express provision which made absolutely clear, if that was truly the intention of the parties, that it was now to be the Fund which would cover compensation in cases of insolvent insurers. In addition, the fact that, in formal and published documents, being its financial statements for a number of years, the MIBI indicated that it considered that it did have a liability in the case of insolvent insurers greatly diminishes any weight which can be attached to an argument which is based on the fact that it would not have entered into such an agreement.
12.5 Finally I have concluded that the internal documentation of the MIBI relied on by both sides cannot properly be taken, in all the circumstances of this case, to influence an objective interpretation of the Agreement.
12.6 In the light of that analysis it seems to me that the key components which determine the proper interpretation of the Agreement are Clause 4.1.1 itself coupled with the contrary indication in the preamble and, to the extent that weight can properly be attached to it, the business sense argument which is at least a matter to which consideration should be given, having regard to the ambiguity created because of the conflict between the preamble and Clause 4.1.1.
12.7 I do place significant weight on the fact that Clause 4.1.1 is the device which the MIBI and the Minister have at all times over the last 60 years chosen as the mechanism for determining the scope of the liability of the MIBI. The Agreement could have been cast in many different ways but that it is the way in which the parties chose to specify the obligations of the MIBI. That clause is, in my view, as the Law Society argued, sufficiently wide to encompass the case of an insolvent insurer. Given that that clause was chosen by the parties as the primary means of defining the obligations of the MIBI, it seems to me that it would have required something of quite significant weight to displace the interpretation of the Agreement as a whole which a consideration of that clause would indicate. While acknowledging that some weight does have to be attached both to the preamble and to the business sense argument, I am not convinced that either of those matters, whether taken in isolation or cumulatively, are sufficient to displace what seems to me to be the natural and ordinary meaning of Clause 4.1.1 itself. To take any other view would, in my judgment, be to elevate either context or subordinate parts of the Agreement to a status which they do not deserve and would be to significantly undervalue the clear meaning of the principal operative clause of the Agreement itself.
12.8 In those circumstances I am satisfied that the proper interpretation of the Agreement as a whole, both having regard to its text and the context in which it and, indeed, its predecessors, were formulated, is such that it must be held to include an obligation on the part of the MIBI to cover liability in any case where a judgment remains unsatisfied for 28 days against a driver whose driving was the subject of compulsory insurance. That general statement is, of course, subject to the caveat that the conditions precedent specified in the Agreement must be met. But I am also satisfied that those conditions precedent only apply to the extent that they have any practical application to the case in question.
13. Conclusions
13.1 There can be little doubt that the issue which arose for consideration on this appeal has very significant implications both for the MIBI, for the motor insurers who are members of the MIBI, for persons injured due to the negligence of drivers insured by Setanta and indeed for drivers who held Setanta insurance but who were unfortunate enough to be involved in accidents for which they are found liable. However, the result of this appeal depends only on the proper construction of the Agreement and not on any policy considerations as to where the liability for compensating those injured due to negligence should properly lie.
13.2 It is unfortunate that the task of construing the Agreement is both complex and not free from doubt. It is particularly unfortunate that, when the Fund was brought into existence as a result of the 1964 Act, the relevant MIBI agreement at the time, or at least its successors, were not amended in a fashion which made clear whether the liability to compensate those injured as a result of the negligence of drivers insured by an insolvent insurer was to fall on the MIBI or, alternatively, on the Fund. If the Agreement in its relevant form came to be drafted in a way which made the answer to that question clear then, I suspect, none of us would be here.
13.3 However, the courts were left with the task of attempting, as best they could, to place an appropriate construction, in accordance with law, on the Agreement as it stands having regard both to the text of the Agreement and the context in which it, and indeed its predecessors, were entered into. That task of interpretation is, in my view, far from easy and the result is not clear-cut.
13.4 However, for the reasons analysed in some detail in this judgment, I would hold that the proper construction of the Agreement as a whole, taken in context, is that it generally imposes an obligation, subject to compliance with such of the conditions precedent as may be relevant in practice, on the MIBI to cover claims made against drivers insured by Setanta. In those circumstances I would dismiss the appeal.

Jackie Greene Construction Ltd v Irish Nationwide Building Society

[2019] IESC 2 (24 January 2019)

Supreme Court
Composition of Court:
Clarke C.J., O’Malley Iseult J., Baker J.
Judgment by:
Clarke C.J.
Status:
Approved
Result:
Other

THE SUPREME COURT
Appeal No: 2012/514

Clarke C.J.
O’Malley J.
Baker J.
Between/
Jackie Greene Construction Ltd
Plaintiff/Appellant
and
Irish Bank Resolution Corporation in special liquidation

Defendant/Respondent

Judgment of the Chief Justice, Mr. Justice Clarke, delivered the 24th January 2019

1. Introduction
1.1 This judgment relates to an “old” jurisdiction appeal which formed part of the backlog which existed in this Court prior to the establishment of the Court of Appeal. This appeal was one of those which were transferred to the Court of Appeal by order of the Chief Justice (made with the concurrence of the other members of the Court) on the 29th October 2014. However, as part of the measures adopted by this Court to assist the Court of Appeal with its own backlog, this appeal was returned to this Court as a result of a determination made on the 26th October 2018 ( Jackie Greene Construction Limited v. Irish Nationwide Building Society [ 2018] IESCDET 165). It might briefly be noted at the outset that, on the 8th November 2018, the Court amended the title of the respondents in this appeal from “Irish Nationwide Building Society” to “Irish Bank Resolution Corporation in special liquidation”, as a consequence of the fact that the interests of Irish Nationwide now vest in that latter body. It should further be noted that, while the settlement agreement whose interpretation is at issue in this appeal was signed on behalf of Irish Nationwide, it is clear from the body of the text that it was the Irish Bank Resolution Corporation which was bound by the terms of the agreement. For the sake of clarity, I will use “IBRC” to describe the defendant/respondent in all instances.

1.2 In any event, none of those matters are of any particular relevance to the issues which now have to be resolved. When these proceedings were initially before the High Court they were compromised between the parties on terms which it will be necessary to set out in a little more detail. However, in substance the settlement terms provided that an expert should be appointed to assess the profits likely to be achieved from the completion of a property development which had been delayed in its completion largely because of the recession. Rather extraordinarily, having regard to the fact that IBRC (in its then operation as Irish Nationwide) was a financial institution, the original arrangements between the parties provided not just for the repayment of loan facilities furnished by IBRC to the plaintiff (“Jackie Greene Construction”) but also for a profit share between the parties. Thus, the arrangements generally provided for the distribution of the net funds generated by the sale of properties within the development so as to pay off the loan advanced by IBRC but then for the sharing of the profits generated thereafter. There were also specific measures agreed as to how the relevant funds would be held pending a final distribution between the parties.

1.3 Given that the finalisation of the sale of the units within the development was inevitably delayed by the recession, disputes arose between the parties as to what was to happen next and these proceedings ensued. The settlement arose in the context of those disputes.

1.4 Thereafter, the matter returned to the High Court as a result of a further dispute arising between the parties as to the proper interpretation of the settlement and the application of the settlement as properly interpreted to the particular circumstances which had arisen.

1.5 That matter was determined by Gilligan J. by a judgment delivered on the 26th June 2012 ( Jackie Greene Construction v. Irish Nationwide Building Society (Unreported, High Court, Gilligan J., 26th June, 2012)) which resulted in an order of the High Court of the 27th July of the same year. That order made provision for what was to happen to the cash already held by the parties and further made provision for a judgment in favour of IBRC in the sum of €8,827,928.50, with credit being given for the cash already obtained together with further credit for 50% of the net proceeds of sale of any unsold units at the development. Provision was also made for a stay.

1.6 It is as against that judgment of the High Court that this appeal lies. In order to understand the precise issues which arise it is necessary to say a little about the original agreement between the parties and the dispute which was the subject of the settlement whose interpretation lies at the heart of this appeal.
2. The Original Agreement and the Dispute
2.1 The underlying proceedings in this case, which led to the settlement agreement forming the subject matter of the current appeal, concerned a series of loan facilities advanced to Jackie Greene Construction by IBRC for the purpose of the purchase of lands at College Drive, Terenure, and the construction of residential and commercial units on those lands (“the Development”).

2.2 As noted above, an aspect of the loan facilities advanced to Jackie Greene Construction was a profit-sharing arrangement, which, rather curiously, was referred to as an arrangement fee. The mechanism for the operation of the profit-sharing arrangement was set out in a number of supplemental loan agreements (“SLAs”) and essentially provided that Jackie Greene Construction was to lodge the net proceeds from the sale of the units at the Development to a designated account held with IBRC in the sole name of Jackie Greene Construction. On completion of the Development, the SLAs provided for a 50:50 distribution of the profits between the parties out of the funds in the account.

2.3 Jackie Green Construction lodged what it maintained were the net sale proceeds to the designated account. As at the 2nd February 2011, the relevant account contained €8,694,396.51. On 3rd February 2011, IBRC removed €6,279,354.06 from the account. Jackie Greene Construction alleged that this was done without prior notice, without their consent, and in circumstances where the Development was incomplete. Jackie Greene Construction issued proceedings seeking the return of that latter sum of money to the account.

2.4 It was, of course, against that backdrop that the settlement, whose terms are now disputed, was entered into between the parties. It is next appropriate, therefore, to turn to the terms of that settlement.
3. Terms of Compromise
3.1 Terms of compromise were entered into between the parties on the 22nd November 2011. A number of the terms of that agreement are of particular importance to the issues which now arise.

3.2 Clause 1 of the terms of compromise provided:-

“The Parties have agreed to an Expert determination in respect of the profit or loss of and concerning the Development of 7 acres at College Drive in Terenure … and as provided for in the Parties’ various Facility Letters and Supplemental Loan Agreements between 15th March, 2002 and 19th April, 2007.”
3.3 Clause 10 provided:-
“In making his decision as to the final determination of profit or loss for the Development, the Expert will carefully consider the possible sale price that can be achieved for the unsold units, and the length of time it may take to sell these units and complete the Development, including the likely ongoing costs while this sale process is undertaken. The Parties agree that all necessary valuations and appraisals in respect of the remaining units to be sold may be obtained by either party and submitted to the Expert as part of his determination. All requisite access to the units will be made available to Jackie Green Construction Limited in respect of any such valuations.”
3.4 Clause 12 provided:-
“The respective undertakings furnished by the parties shall continue and more particularly, in lieu of the undertaking to date furnished by Irish Nationwide Building Society, the Irish Bank Resolution Corporation undertakes to hold, free from charge or encumbrance the sum of €6,279,354.06 together with interest accrued since 4th February, 2011, and Jackie Green Construction Limited undertakes to take no steps to access or otherwise utilise the funds formerly in account number 301418439 and now in an account held in PTSB … in the sum of €2,415,042.45, pending the Expert’s decision of the profit or loss.”
3.5 Clause 13 of the compromise agreement governed what was to happen in light of the expert’s determination:-
“The Parties agree that the Expert’s decision in respect of the profit (if any) will be first satisfied from the funds in respect of which the relevant Parties have given their above undertakings and thereafter insofar as those funds are insufficient to meet the award of the Expert, or insofar as the Expert identifies a profit related specifically to future sales of units in the Development, the balance shall be distributed from the net proceeds, as defined in the Supplement Loan Agreements, of actual sales of the units currently remaining unsold in the Development on a 50:50 basis as such net proceeds become available, until the entirety of the profit identified by the Expert has been distributed or the entirety of the net proceeds of sale of all units has been exhausted, whichever occurs sooner. In the event the profit identified has not been discharged within five months from the Expert’s decision or 1st September, 2012 whichever is the latest, the Parties agree that any remaining unsold units are marketed and sold as soon as practicable and for the best market price available at that time. …”
3.6 Clause 17 provided:-
“Following the discharge in full of the profits to Irish Bank Resolution Corporation as set out at paragraph 13 above, it is agreed that the Irish Bank Resolution Corporation shall release Jackie Green Construction Limited from any or all encumbrances related to the Development and the directors of the said company will be released from any personal guarantees provided by them on such discharge.”
3.7 As of the time of the hearing of the appeal before this Court there still remained one unit to be sold so that the precise financial outcome is not absolutely clear. However, it does appear on the facts that the total funds generated by the sale of the units which remained unsold at the time of the compromise will be insufficient to ensure that all of the monies representing 50% of the profit as determined by the expert can be paid to IBRC. It is suggested that this was an unanticipated result, but nonetheless it would appear to be what has factually occurred. It is the proper interpretation of the compromise agreement in that context and its application in those circumstances that lies at the heart of the dispute between the parties. Before going on to identify the precise issues of interpretation which arise, it is appropriate to briefly set out the facts which have transpired since the settlement or compromise was entered into.
4. The Post Settlement Facts
4.1 Mr. Derek Donohoe, a partner with RSM Farrell Grant Sparks (“the Expert”), was appointed as expert by the parties in accordance with the terms of compromise.

4.2 On the 2nd April 2012, the Expert issued his determination, concluding that the profit from the Development was €17,655,857.00, and that each party was accordingly entitled to €8,827,928.50.

4.3 A dispute arose between the parties as to the proper interpretation of the terms of compromise. IBRC issued a motion on the 24th April 2012 seeking judgment against Jackie Greene Construction in the sum of €2,548,574.44, being the difference between the profit share identified by the Expert (€8,827,928.50) and the sum already received by IBRC from the designated deposit account (€6,279,354.06). IBRC also sought payment of a sum in part satisfaction of that judgment.

4.4 Jackie Greene Construction resisted the motion on the basis that the proceeds of sale held in the account were insufficient to satisfy each party’s entitlement as determined by the Expert and that the balance of profit due to each party should be satisfied on a 50:50 basis from the net proceeds of sale following the disposal of the then 23 remaining units in the Development.

4.5 The motion was heard before Gilligan J. in the High Court. As noted above at para. 1.5, Gilligan J. made an order on the 27th July 2012 which made provision for what was to happen to the cash already held by the parties and further made provision for a judgment in favour of IBRC in the sum of €8,827,928.50, with credit being given for the cash already obtained together with further credit for 50% of the net proceeds of sale of any unsold units at the Development. The execution and registration of that judgment was stayed pending the sale of all the unsold units at the Development. As noted above, at the time of the hearing of this appeal, there still remained one unsold unit.

4.6 There was no significant dispute between the parties as to the proper approach to be adopted in relation to the construction of the settlement agreement. However, it is appropriate to briefly set out the relevant principles.
5. The Approach to Interpretation
5.1 It is accepted that the law relating to the interpretation of settlement agreements does not differ from the law relating to the interpretation of any other type of contract. In this regard, reference might be made to Delany and McGrath on Civil Procedure , 4th Ed., (Dublin, 2018) at para. 20-12, where the authors explained the approach of the courts in this context in the following way:-

“As noted above, a settlement agreement is a contract and, in Bank of Credit and Commercial International v. Ali , the House of Lords confirmed that the general principles of contractual construction apply to settlement agreements and rejected the proposition that any special rules of construction were to be applied in construing the meaning of a release contained in such an agreement. Applying those principles of contractual interpretation, where a question arises as to the meaning of a provision in a written settlement agreement, then as explained by Keane J in Kramer v. Arnold , ‘the task of the court is to decide what the intention of the parties was, having regard to the language used in the contract itself and the surrounding circumstances’. While it is open to a court to imply a term in a Terms of Compromise, this can only be done if the requirements for doing so are satisfied.”
5.2 The more recent authorities in this area suggest that the detailed rules for the proper approach to the construction of contractual documents all derive in substance from the approach which can be encapsulated in the phrase “text in context”. In that regard, reference might be made to my own judgment in Lanigan and ors. v. Barry and ors . [2016] IESC 46, where I stated:-
“The principles applicable to the construction of a planning permission are, of course, well settled and were described by McCarthy J. in the oft-quoted passage from In re. X.J.S. Investments Ltd [1986] IR 750 as requiring the Court to construe planning documents not as complex legal documents drafted by lawyers but rather in the way in which ordinary and reasonably informed persons might understand them. It might, in passing, be appropriate to note that this was, perhaps, an early example of the move towards what has been described as the ‘text in context’ method of construction appropriate to the determination of the meaning of all documents potentially affecting legal rights and obligations. This approach has now become well established. The ‘text in context’ approach requires the Court to consider the text used in the context of the circumstances in which the document concerned was produced including the nature of the document itself.”
5.3 Similarly, in The Law Society of Ireland v. The Motor Insurers’ Bureau of Ireland [2017] IESC 31, I described the “text in context” method of construction in the following terms:-
“The modern approach has sometimes been described as the ‘text in context’ method of interpretation. It might be said that the older approach in the common law world placed a very high emphasis indeed on textual analysis without sometimes paying sufficient regard to the context or circumstances in which the document in question came into existence. On the other hand, it is important not to lose sight of the fact that the document whose interpretation is at issue forms the basis on which legal rights and obligations have been established. That is so whether the document in question is a statute, a contract, the rules of an organisation, a patent or, indeed, any other form of document which is designed, whether by agreement or unilaterally, to impose legal rights and obligations on either specific parties or more generally. To fail to have sufficient regard to the text of such a document is to give insufficient weight to the fact that it is in the form of the document in question that legal rights and obligations have been determined. However, an over dependence on purely textual analysis runs the risk of ignoring the fact that almost all text requires some degree of context for its proper interpretation. Phrases or terminology rarely exist in the abstract. Rather the understanding which reasonable and informed persons would give to any text will be informed by the context in which the document concerned has come into existence.
Perhaps it is fair to say that the main underlying principle is that a document governing legal rights and obligations should be interpreted by the courts in the same way that it would be interpreted by a reasonable and informed member of the public who understands the context of the document in question. Such a person would, necessarily, pay a lot of attention to the text but would also interpret that text in its proper context.”

5.4 As is clear from those authorities, it is important to give due recognition both to the text of any document creating legal rights and obligations and to the context in which the words used in the measure concerned were chosen. To fail to give adequate weight to the words is to ignore, or downplay, the fact that those were the words that were chosen to define the relevant legal arrangement. To fail to give adequate weight to context is to ignore the fact that all language is inevitably interpreted by reasonable persons in the light of the context in which that language is used.
5.5 In addition, it is clear from the authorities referred to that part of the relevant context is the nature of the document governing legal rights and obligations whose construction is at issue. The more formal the document the less one would expect to find errors or looseness of language. Contractual documents entered into after careful negotiations between experienced lawyers on behalf of the parties may be seen to operate in a different context to, for example, the informal rules of a small association. In all cases the text is important, but part of the context in which that text needs to be considered is the manner in which that text was arrived at, and the circumstances which led to the text being required and/or agreed.

5.6 Before going on to apply those principles to the circumstances of this case it is necessary to describe the approach of the High Court and briefly outline the argument in this Court.
6. The High Court
6.1 As noted above, Gilligan J. delivered the judgment of the High Court on the 26th June 2012. Having reviewed the relevant factual background, the terms of the compromise agreement and the Expert’s determination, Gilligan J. ultimately concluded that Jackie Greene Construction owed IBRC €8,827,928.50. Gilligan J. did acknowledge that, from the perspective of Jackie Greene Construction, it may not have been considered that there would be a shortfall resulting from the Expert’s determination of the profit as compared to the actual profits derived from the sale of the units.

6.2 However, Gilligan J. ultimately concluded that the terms of the compromise agreement were unequivocal in relation to the binding nature of the Expert’s determination on the parties. Gilligan J. held that payment of the sum was to come first from the funds in respect of which the parties had given undertakings and second from the sale of the unsold units. Gilligan J. stated that, thereafter, it appeared that, in the event of a shortfall, IBRC was entitled to judgment against Jackie Greene Construction for the balance which remained due as a result of the Expert’s determination of the profit arising from the Development.
7. The Argument
7.1 In the present appeal, Jackie Greene Construction argue that Gilligan J. erred in his interpretation of the terms of compromise, in particular by failing to recognise what was said to be the mutual entitlement of the parties to a 50% share in the net profits from the Development and in finding that the terms of compromise had not made express provision for circumstances in which there was a shortfall in monies available to satisfy the parties’ profit entitlements.

7.2 Jackie Greene Construction submit that the terms of compromise must be interpreted in light of the SLAs, as those agreements provide the factual context against which the terms of compromise were concluded. In that regard, they emphasise the clause in the relevant SLA providing for the profit sharing arrangement. This is the crux of the submissions: that it was always intended that the parties would share in whatever profit or loss arose as a result of the sale of the units at the Development. Jackie Greene Construction argue that this is contained in the SLAs, as well as in the terms of compromise, and was acknowledged by the Expert in his determination.

7.3 Regarding the High Court’s finding that there was no provision made for a shortfall scenario, Jackie Greene Construction point to Clause 13 of the compromise agreement. They submit that Clause 13 exclusively identified two sources for the distribution of profits, being the funds already held by the parties (i.e. the sum of €8,694,396.51) and in the event that those monies were insufficient to meet the Expert’s determination, the net proceeds from the actual sale of the units then remaining unsold. It is highlighted that Clause 13 provides that the net proceeds of actual sales of the remaining units were to be distributed “on a 50:50 basis as such net proceeds become available, until the entirety of the profit identified by the Expert has been distributed or the entirety of the net proceeds of sale of all units has been exhausted, whichever occurs sooner ” (emphasis added). It is this latter phrase, they argue, which recognises the possibility that there might be a shortfall in monies available to satisfy the profit identified by the Expert. Jackie Greene Construction submit that the ultimate effect of this clause is that, once the remaining units have been sold and the net proceeds distributed, neither party has any entitlement to further payment.

7.4 A final issue arises regarding interest accrued on the monies held on deposit by the parties. Clause 12 of the terms of compromise required IBRC to hold the sum of €6,279,354.06 “together with interest accrued since 4 February 2011” pending the Expert’s determination. Jackie Greene Construction submit that any interest earned on that sum should form part of the pot from which profit is to be distributed.

7.5 For their part, IBRC emphasise the terminology used in Clause 3 of the settlement agreement, to the effect that “[t]he determination of the Expert on all issues shall be accepted as final, binding and without appeal or review.” They submit that Jackie Greene Construction are attempting to undermine the binding nature of the Expert’s determination in their submissions by seeking to introduce an element of contingency.

7.6 IBRC acknowledge that Clause 13 recognises the possibility of a shortfall, but submit that the terms of compromise do not indicate what has to happen should such a shortfall arise. They submit that this is in fact what Gilligan J. found in his judgment. IBRC further reject the argument that Clause 13 lists exhaustively the sources from which recourse can be had in order to satisfy its entitlement to a share of the profits. They submit that, if this were the case, it would be inconsistent with the terms of Clause 3 as just set out. If it were necessary to wait until all the units had been sold before the precise extent of the parties’ entitlements were to become clear, IBRC submit that this would render the Expert’s determination nugatory.

7.7 Finally, IBRC characterise Jackie Greene Construction’s interpretation of the settlement agreement as meaning that IBRC is not entitled to any share in the profits realised from the Development which exceeds the sum determined by the Expert. This is accepted by IBRC. However, they also submit that, on the argument of Jackie Greene Construction, that company was not obliged to pay IBRC the half share of the profit identified by the Expert if the profit actually realised from the Development were to fall short of the Expert’s determination. This, they argue, represents a lopsided agreement which does not accord with business common sense and would require clear contractual language, which is said to be lacking in the compromise agreement. Indeed, IBRC argue that this interpretation flatly contradicts Clause 3 of the terms of compromise agreement to the effect that the determination of the Expert was to be “final, binding and without appeal or review”.
8. Discussion
8.1 It seems to me that a first, and particularly important, aspect of the proper construction of the disputed parts of the compromise agreement in this case must be to identify the purpose behind the appointment of an expert in the first place.

8.2 The position which pertained prior to the settlement being entered into was that the parties had already committed to sharing the profits from the Development on a 50:50 basis. The disputes which had arisen concern matters regarding the calculation of that profit share, such as whether all appropriate sums had been lodged by Jackie Greene Construction to relevant accounts, whether there was any legal basis on which IBRC could, as they had done, simply have taken the monies from the account, and how the original agreement between the parties was to operate in practice given the fraught financial circumstances which existed at the time.

8.3 It was also clear that the determination of the profit by the Expert would inevitably involve some degree of estimation. Obviously, in respect of those properties which had already been sold, the Expert could use his knowledge as an accountant to work out the actual profits which had been earned. But insofar as further properties remained unsold and insofar as there were likely to be costs incurred in arriving at a situation where those additional properties could be sold, the calculation of the profits likely to be derived from the unsold properties necessarily involved estimation.

8.4 It follows that the overall figure for the profit which was going to be determined by the Expert would not necessarily equate to the actual profits which would ultimately be derived from the Development as a whole. By definition, the inclusion of a material estimated part of the equation led to a situation where it was improbable that the Expert would get his estimation exactly right (that is to say, that it would exactly conform with the amount of profits which would ultimately derive) and there was at least a possibility that the estimation might be significantly out, even if entirely competently calculated.

8.5 It follows that the fact that the parties placed an expert determination at the centre of their settlement agreement meant that that estimation would not necessarily correspond to the profits which might, with the benefit of hindsight, be properly calculated as deriving from the Development as a whole when it was completed and all the units sold. But in those circumstances there must have been some purpose which the parties sought to achieve by appointing an expert and providing that the determination by that expert of the profits was to bind the parties. Clearly, there would be no point in nominating an expert and conferring the role of expert determination upon him, if the parties were entitled to revisit, in the light of experience as it ultimately panned out, the question of the overall profits. Any construction of the settlement agreement must, in my view, reflect those circumstances. The parties were buying into an expert determination even though it would necessarily be an estimate and might, with the benefit of hindsight, turn out not to accurately reflect the profits ultimately made. It follows that any reasonable construction of the agreement must accept that there could be consequences, one way or the other, of it transpiring that the ultimate outturn was different from the Expert’s determination, for if it were to be otherwise there would have been no point to the nomination of an expert in the first place.

8.6 In the light of that analysis it is necessary to turn to the two key clauses in the compromise agreement, which are Clauses 13 and 17. Clause 13 first specifies that the amounts identified by the Expert are initially to be satisfied from the funds held by the parties, being, in the case of IBRC, €6,279,354.06 together with interest, and in the case of Jackie Greene Construction, a sum of €2,415,042.45.

8.7 Obviously, at the time of entering into the compromise, the amount of profit to be identified by the Expert was unknown and Clause 13 therefore follows in a conditional sense in providing that, insofar as the funds available were insufficient to meet the award of the Expert or insofar as the Expert-identified profit related specifically to future sales, the balance outstanding “shall be distributed from the net proceeds, as defined in the supplemental loan agreements, of actual sales”. It was also provided that this was to continue to apply “until the entirety of the profit identified by the Expert” had been distributed or the entirety of the net proceeds of sale of all units had been exhausted, whichever occurs sooner. That latter phrase seems to contemplate two possibilities. First, it might be that the amounts which would ultimately become available would be sufficient to meet the profit share identified by the Expert. On that basis, the net proceeds were to continue to be shared until such time as the profit share identified by the Expert had been met. The alternative was that the net proceeds might become exhausted prior to the profit share identified by the Expert being reached.

8.8 However, the agreement does not expressly state what is to happen after one or other of those eventualities occurred. In the former case, being where the profit shares are met, and assuming that the Expert did not get the profit correct down to a single euro, there would likely be further net proceeds coming in. The question arises as to what is to happen to those additional net proceeds above and beyond the profit share identified by the Expert.

8.9 In the other eventuality, the agreement is again silent on what is to happen if the event which occurs “sooner” is the exhaustion of net proceeds without reaching the sum required to provide for the profit share identified by the Expert.

8.10 It has to be said that it is unfortunate that the agreement does not appear to have dealt, in express terms, with what is to happen in either of those eventualities. It would have been very easy for the parties to have set out, in clear and unambiguous terms, what regime was to apply in either case. In those circumstances it is necessary for the Court to interpret the contract as best it can.

8.11 However, the overriding factor, in the circumstances of this case, seems to me to be the fact that the profit share identified by the Expert would have no practical meaning if the net result was that the parties were to share the profits on a 50:50 basis calculated after all the units had been sold and thus without any element of estimation or valuation. That was the position which pertained under the SLAs in any event. The compromise agreement would not, if that were the case, have altered the situation. This being a business agreement it must be assumed that the parties intended that the appointment of an expert was to make some difference. It follows, in turn, that it must have been contemplated that there could be winners and losers depending on whether the ultimate outturn exceeded or failed to meet the Expert’s valuation.

8.12 In that context it seems to me that Clause 17 provides some assistance in discerning the intention of the parties, as can be gleaned from the words which they chose to use in what was, after all, a carefully drafted compromise agreement entered into with the benefit of significant legal advice. Clause 17 provides that Jackie Greene Construction was to be released from all encumbrances related to the Development (including the release of directors from guarantees) “following the discharge in full of the profits” to IBRC. That clause would be somewhat contradictory if the proper construction of Clause 13 did not require the discharge in full to IBRC of its share of the profit identified by the Expert. That contradiction would arise from one clause (Clause 17) allowing IBRC to retain security until the full amount of its profit share were obtained, but another clause (Clause 13), on the construction advocated by Jackie Greene Construction, absolving that company from having to procure that IBRC received its full profit share as identified by the Expert.

8.13 It is also necessary, at this stage, to address the principal argument put forward on behalf of Jackie Greene Construction which was to the effect that it was, at all times, both in the original agreements identified in the SLAs but also in the compromise agreement, accepted that both parties would share the profit on a 50:50 basis. Clearly, if the analysis of the High Court is correct then, in the events that happened, the consequence of the compromise agreement will be that IBRC will obtain a greater share of the profits than Jackie Greene Construction. It is undoubtedly true that this is an arrangement which was not contemplated in the original agreements between the parties. However, the real question is as to whether the terms of the compromise agreement altered that situation. It seems to me that they did. By accepting the binding nature of the determination of the profits by the Expert in circumstances where that determination would necessarily involve an element of estimation, it seems to me that Jackie Greene Construction were accepting that the 50:50 split previously agreed might be departed from in circumstances where the profits ultimately earned fell short of or, indeed, exceeded the amount determined by the Expert.

8.14 In addition, by accepting that the sums actually held by the parties at the time of the compromise agreement (which were significantly skewed in favour of IBRC) would be the first port of call, Jackie Greene Construction was accepting that the company would be at risk of losing out if there were a shortfall in the profits ultimately realised.

8.15 The fact that it might well not have been considered likely that the shortfall would be so large that Jackie Greene Construction would actually be required to pay over money to IBRC does not affect the fact that such a risk is inherent in the arrangements entered into. As noted in Clause 13, it was acknowledged that the profits determined by the Expert would first be satisfied from the funds which the relevant parties already held and in respect of which they had given undertakings. On that basis, IBRC would start with a payment of just over €6Â¼m while Jackie Greene Construction would start with the sum of just under €2Â½m.

8.16 The second set of payments was to come from a 50:50 distribution of the net proceeds of the as yet unsold units. In that context it may be useful to take a simple example of it transpiring to be the case that those additional funds were sufficient to bring IBRC up from the amount of just over €6Â¼m to the value of 50% of the profits as determined by the Expert. It would be clear that, at that time, IBRC would have received their full profit share on the basis of the determination by the Expert but Jackie Greene Construction would have received almost €4m less. That analysis demonstrates that the compromise agreement clearly contemplated a departure from the 50:50 split which had originally applied between the parties.

8.17 In those circumstances, and while accepting that there is some ambiguity in the contract, I am satisfied that the proper approach to the construction of the contract as a whole is that it bound Jackie Greene Construction to procure that IBRC received its share of the profit as determined by the Expert. To take any other view would be to render the expert evaluation which lay at the heart of the compromise agreement at nought and would also create a contradiction with Clause 17.

8.18 In the light of that finding, I would hold that the proper construction of the compromise agreement provides that IBRC was entitled to the 50% share of the profit determined by the Expert. However, a further question arises as to the proper order which should have been made in those circumstances.
9. The Order
9.1 Having concluded that the trial judge was correct in his interpretation of the compromise agreement it, however, also seems to me that the trial judge was incorrect to give judgment for the full sum against Jackie Greene Construction. What the compromise agreement provided for was not just a determination of the profit on the basis of an estimation in respect of which both parties would be bound, but also a method for payment. IBRC were entitled, in accordance with the agreement as thus interpreted, to the release to them of the sum of €6,279,354.06 together with interest. It follows that the interest accrued must be included in the sum for which IBRC are to be given credit in determining the sums actually paid over in part satisfaction of 50% of the profit as determined by the Expert. IBRC were also entitled to a declaration that Jackie Greene Construction, whether by the release of monies which they held, or otherwise, was obliged to make up the shortfall between that sum and 50% of the profit share as identified by the Expert. It seems to me that an order along those lines would have been more appropriate rather than a judgment for a sum which Jackie Greene Construction would never have been obliged to pay over. The granting of a judgment in those circumstances might well be apt to mislead persons as to the financial position of Jackie Greene Construction.

9.2 I would, therefore, propose that orders be made providing for the release of the monies held by IBRC and also declaratory orders concerning the balance. I would propose hearing counsel further on the precise form of orders which should be made.

Luxor Investments Ltd & ors -v- Beltany Property Finance Ltd

[2015] IEHC 316 (13 May 2015)

High Court
Judgment by:
McGovern J.
Status:
Approved
___________________________________________________________________________

Neutral Citation [2015] IEHC 316

JUDGMENT of Mr. Justice Brian J. McGovern delivered on the 13th day of May, 2015
1. On 5th March, 2015, Fullam J. directed an expedited hearing of a discrete issue in these proceedings, namely:-

“Whether or not an agreement dated 25 October, 2013, made between Luxor Investments Limited and Luxor Leisure Limited (the ‘UBSIG obligors’) of the one part and UBSIG (ROI) Limited (the ‘UBSIG Agreement’) is applicable in circumstances where the plaintiffs propose to redeem their loans with the defendant at par.”
2. It appears, in fact, that this is the sole remaining issue in dispute in these proceedings. The UBSIG Agreement has the title “Fee Agreement” and for ease of reference I will use that term throughout this judgment when referring to the agreement.
Background
3. The plaintiffs are part of the Rhatigan Group of companies. Some of these companies have been customers of Ulster Bank Ireland Limited (“UBIL”) for approximately seventeen years. Facilities advanced by UBIL to the Rhatigan Group have included development finance, investment finance, life insurance policies, interest rate instruments, current accounts and deposit accounts. The plaintiff companies have been involved in land purchase and development and property management. Up until 2013, all accounts held by the Rhatigan Group with UBIL performed within the terms of their agreements. Loans were repaid on completion of relevant developments or on maturity and overdrafts operated within agreed limits.

4. Luxor Investments Limited (the first plaintiff) is a limited liability company and a wholly owned subsidiary of PSR Property Company Limited (sixth plaintiff). It is the owner of properties in Dublin City Centre. It is also the developer and owner of the Radisson Blu Royal Hotel, Golden Lane, Dublin 8 (“the hotel”).

5. Luxor Leisure Limited (second plaintiff) is a limited liability company which holds the occupational interest in the hotel pursuant to the terms of an occupational lease and is the operating company of the hotel. It is also the guarantor of a loan facility in respect of the hotel.

6. Almada Limited (third plaintiff) is a limited liability company and is the owner of a property at Ship Street, Dublin and three apartments known as Castleway Apartments at Castleway, Golden Lane, Dublin 8.

7. Ballincastle Construction Limited (fourth plaintiff) is a limited liability company and is the developer and owner of manufacturing units at Athlone, Co. Westmeath, developed in conjunction with the Industrial Development Authority. It is also the owner of premises known as the Atlantaquaria, Galway.

8. In 2012, UBIL, on instructions from its parent Royal Bank of Scotland (“RBS”), commenced a strategy designed to deleverage their loan book. At that time, they indicated to the plaintiffs that they were not prepared to extend further facilities and that the Rhatigan Group should seek new investors for their facilities. A number of proposals were put forward by the Rhatigan Group but were not acceptable to UBIL and this culminated in a restructuring of certain facilities and ultimately led to the fee agreement being concluded. In restructuring the Rhatigan Group, certain facilities were granted by UBIL in respect of the funding of loans connected to those properties other than the hotel. These are referred to as the “non-hotel facilities”. The non-hotel facilities are supported by First Legal Mortgages over Luxor properties, the Almada properties and the Ballincastle properties, together with various corporate guarantees and an extension of conditional personal guarantees provided by Mr. Padriac Rhatigan (fifth defendant). The non-hotel facilities are “demand facilities” repayable on or before 30th April, 2015.

9. The hotel was built between 2005 and 2007, and was funded by a combination of debt provided by UBIL, equity contributions provided by certain entities in the Rhatigan Group and a number of third party investors (the “consortium”). The funding provided by UBIL was (pursuant to a facility letter of 21st December, 2007) to two nominee companies established by agents of UBIL, namely Cassius Investments Limited and Tolamor Limited (the “hotel borrowers”). This was supplemented by a facility letter of 23rd September, 2009. The funding of the hotel was part of a tax efficient scheme whereby investors could avail of capital allowances. On 20th December, 2007, Luxor contracted to sell the hotel to the hotel borrowers on behalf of the consortium, who acquired and held the beneficial ownership of the hotel on trust for members of the consortium. The purchase price for the sale of the hotel to the hotel borrowers was €50m of which €39,854,000 was funded by the hotel facility with the balance being funded by equity mainly from the Rhatigan Group.

10. The hotel facility is secured by legal mortgages, charges and security assignments over the respective interests of the hotel borrowers, Luxor and Luxor Leisure in the hotel, the occupational lease, an option agreement, a management agreement and co-ownership agreement and the assignment of contracts and collateral warranties entered into in respect of the construction of the hotel. In 2009, additional security for the hotel facility was provided to UBIL by the first plaintiff and Driftview Enterprises Limited (seventh plaintiff) which was a guarantor of the hotel facility and by Ballincastle, Almada and J.J. Rhatigan and Company. Notwithstanding this funding structure, the plaintiffs claim that it was always intended that the repurchase of the hotel by Luxor (on foot of a put and call option) would be funded by longer term property finance. When the original funding structure was put in place, it was not believed that it would be difficult to obtain such longer term finance.

11. From the establishment of the hotel in 2007, the hotel facility at all times continued to perform in accordance with its terms. And as of the year ending December 2014, the hotel returned an operating profit of approximately €2.8m.

12. In 2009, the non-hotel facilities were refinanced for a further three years on the basis that all income from non-hotel assets would be applied to service interest in the first place and that any surplus would be applied in reduction of capital. In the five years prior to these court proceedings, all interest on the non-hotel facilities has been fully serviced and the capital has been reduced by approximately €14m. When the non-hotel facilities fell due for review in 2012, UBIL informed the plaintiffs that they were not prepared to extend further facilities but were seeking to deleverage their loan book and that the Rhatigan Group should seek new investors and funding elsewhere. During 2012 and 2013, the Rhatigan Group sought new funders and discussions continued with UBIL culminating in a restructuring of non-hotel facilities in October 2013.

13. These restructuring facilities involved the existing UBIL loans granted to Almada, Ballincastle and Luxor being extended and a new facility letter dated 15th October, 2013, was signed. The 2013 facilities were “demand” facilities but repayable on or before 30th April, 2015. UBIL was pressing the Rhatigan Group to sell non-hotel assets and insisted on the appointment of selling agents and solicitors to engage in that process. The plaintiffs claim that they cooperated with UBIL in this process and were not made aware that the bank intended to sell their loans. It was agreed, that insofar as the relevant commercial properties were sold, the conditional personal guarantee which had been entered into by Mr. Padraic Rhatigan (fifth plaintiff) would be reduced by an agreed amount in respect of each property. The programme of property sales appears to have slowed down or ceased in the spring of 2014, but the Rhatigan Group continued to manage the assets on a day to day basis.

14. In March 2014, Mr. Rhatigan was advised by Mr. Gareth Fay of UBIL that it had discussed the possibility of the sale of the Rhatigan Group loans (including the hotel facility) to a potential investor representing an international private equity fund. These loans were eventually sold to the defendant and on 14th October, 2014, UBIL formally notified the Rhatigan Group that it had agreed the sale of the loans to the defendant. Both the hotel facility and non-hotel facilities were included in the sale.
The Fee Agreement
15. As part of the restructuring in 2013, the first and second named plaintiffs entered into a Fee Agreement with UBSIG, a subsidiary of UBIL. Under the Fee Agreement, the first and second named plaintiffs agreed to pay a fee to UBSIG on each completion date, the completion date being a date on which the property is either sold in whole or in part. In other words, there was to be the payment of either a single fee or – if there was a series of part disposals – a number of fees, either on the termination date in October 2018 or on an earlier termination date being not less than three years from the date of the agreement. So if there was no disposal of properties then, the fee became payable in October 2018.

16. It is clear that the agreement provided for the payment of the fee independently of the repayment of the loans. Counsel for the defendant argues that it was only if the loans were redeemed at par that the fee could be paid. There was to be a minimum fee of €1m. The fee was to be calculated on the disposal of the hotel or at the termination date by reference to the market value of the hotel at disposal or termination date against a base value.
Redemption at Par
17. The plaintiffs have secured the assistance of a financier who was prepared to restructure their loans in such a way as to enable them to redeem their loans in respect of the hotel facilities and non-hotel facilities. This would be a redemption at par to include all interest due.

18. Having purchased the loans and the Fee Agreement, the defendant has refused to consent to the redemption of the loans but maintains that it is entitled to a fee calculated on the basis of the Fee Agreement. In order to remove this obstacle, the plaintiffs have offered to place €2.1m into an Escrow account pending the determination of these proceedings. The €2.1m was calculated on the basis of a hotel valuation of €43m. That proposal was not acceptable to the defendant. The defendant indicated to the plaintiffs that it considered a sum of €8.4m would be required to protect its position in respect of the fee that would be payable in October 2016, but eventually it put forward a proposal that the sum of €7.35m would be paid into Escrow account by the plaintiffs to protect the defendant’s position and that the plaintiffs’ financial backer would take a second charge on the properties. The parties have been unable to reach any agreement on this.

19. In summary, therefore, the position is that the plaintiffs have a financial backer which will enable them to redeem their loans at par (including all interest payments due) but the defendant which has bought the plaintiffs’ loans and the Fee Agreement is unwilling to discharge the plaintiffs from liability under the Fee Agreement.
Issues
20. The issues raised are as follows:-

(a) whether the Fee Agreement applies in the event of a redemption of the loans at par; and
(b) is the Fee Agreement void as a clog on the plaintiff’s equity of redemption?

21. There was a consensus among the witnesses that at the time when the Fee Agreement was entered into, it was not anticipated that the loans would be redeemed at par. In his witness statement, Mr. Padraic Rhatigan stated that the Fee Agreement “…was never intended to be, nor is, applicable in circumstances where we are redeeming the loans in full”. He repeated this in his evidence. Mr. Gareth Fay, (formerly of Ulster Bank) stated in his witness statement that Mr. Rhatigan’s statement was incorrect and that it was always intended that the fee would be payable in accordance with the written terms of the agreement regardless of the outcome with respect to the sale of the non-hotel assets. But he stated in evidence that the restructuring took place and the Fee Agreement was concluded on the assumption that there would be a sale of the non-hotel assets and that redemption at par was simply impossible (see answer 599, Day 2 of transcript).
22. His oral testimony to the court is supported by a letter of 27th May, 2014, which he wrote on behalf of the bank to the plaintiffs’ solicitors in which he stated:-

“Under the restructure, a significant portion of the commercial benefit of the restructure accrued to Padraic (in his capacity as personal guarantor) and his group of companies. The requirement to enter into a Fee Agreement with UB SIG (ROI) Limited in respect of the Radisson Hotel was a mechanism for the bank to capture an element of potential future equity value in the hotel which might, to some extent off set losses incurred by the bank in the settlement of the group company debt and the dilution of Padraic’s personal guarantee position.” (Emphasis added)
23. In the course of the evidence, there were a number of references to the fact that the bank would be taking a loss on the restructuring and that the restructuring was, to some extent, an attempt to ameliorate the losses which would be suffered by the bank. This was the background or “factual matrix” against which the Fee Agreement was concluded.
24. I am satisfied on the evidence that at the time when the Fee Agreement was concluded, the parties did not expect that the plaintiffs’ loans would ever be redeemed at par, notwithstanding the wording of the Fee Agreement, which I will discuss in more detail later. The facts of this case raise interesting and difficult legal questions. The plaintiffs collectively carry on a substantial business enterprise and in order to finance that business they have borrowed large sums of money from UBIL. The UBIL loan and the Fee Agreement have been purchased by the defendant. The plaintiffs have secured the support of a financial backer and are in a position to redeem their outstanding loans at par. But the defendant which has bought the loans and the Fee Agreement will not agree to this unless the terms of the Fee Agreement are adhered to. If the defendant is correct in the position it has adopted, it will effectively mean that it will recover a sum which could be any figure between €1m and €8.4m over and above the amount of the loans. In circumstances where the loans will be repaid at par this seems to impose a very harsh burden on the plaintiffs.

25. When the plaintiffs entered into the Fee Agreement it is clear that they had legal advice. They cannot repudiate the agreement nor have they sought to do so. They are simply challenging its enforceability or applicability in the circumstances which have now arisen and were never contemplated at the time when the agreement was concluded. In considering the Fee Agreement, I have to decide whether there are ambiguities in it or matters requiring a construction of the document. Having considered the document and the evidence and legal submissions, I am satisfied that there is no ambiguity in the words used in the Fee Agreement. The language of the Fee Agreement is clear. But as Lord Hoffman said in Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 All ER 98 at p. 115:-

“The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.”
(Emphasis added)

26. In Analog Devices B.V. v. Zurich Insurance Co. Limited [2005] 1 IR 274, Geoghegan J. in delivering the judgment of the Supreme Court approved the principles set out by Lord Hoffman in Investors Compensation Scheme which he quoted at pages 280 – 281.
27. The words used in the Fee Agreement are clear. But there is a lack of clarity about the circumstances in which the agreement is enforceable due to omissions in the agreement. Under the agreement, the defendant will be entitled to a fee on the disposal of the hotel at the termination date whether this be October 2018 or an early date being not less than three years from the date of the agreement.

28. Mr. Denis Murphy of Deloitte and Touche gave evidence to the court. He was part of the advisory team that assisted the plaintiffs in negotiating with Ulster Bank in 2012 and 2013. He said that at the time of the restructuring it was generally accepted that there was going to be a loss on the sale of the assets. In conversations with Mr. Gareth Fay of UBIL in early 2013, it was accepted that there was a deficit in the non-hotel portfolio between €31.8m or €27.5m depending on which CBRE valuation was applied. Mr. Fay referred to the bank taking a “big hit” on the property portfolio and the restructuring negotiations centred around the bank taking equity in either the hotel or trading company, J.J. Rhatigan and Company. His evidence was that the Fee Agreement was not heavily negotiated but that the main change made was that the “relevant percentage” in the agreement was reduced from 95% to 70%. He said that the theme of an equity participation by the bank was repeated continuously over the course of the restructuring process. Clearly if the plaintiff group of companies was capable of paying off the debt in full, the restructuring would not have taken place.

29. The evidence at the trial establishes that the bank did wish the non-hotel properties to be sold off and while valuers were retained, it appears that this process stalled at some point and was never completed. At that time, the proposed sales would not have yielded full value in respect of the loans. In his evidence, Mr. Murphy said that at the time the Fee Agreement was concluded there was no prospect of repayment of the loans at par and that the assets had values of approximately €20m and the debts were around €45m to €48m.

30. Although the agreement contains a “complete agreement” clause, it seems to me that this is not of assistance in resolving the dispute between the parties because the dispute arises not out of some alleged agreement or collateral understanding but rather out of matters not covered by the agreement itself.

31. One of the curious features about this case is that while the evidence establishes that the parties to the agreement did not expect that circumstances would permit the loans to be redeemed at par, the agreement itself, on one reading, might suggest otherwise. The agreement prescribes a detailed and comprehensive mechanism for calculating the fee payable, principally by reference to two contractual constructs namely, a base value and the market value. It provides for a “Minimum Fee” of €1m, which begs the question as to how that minimum fee was to be paid if the loans could not be redeemed at par. The agreement recites that the first named plaintiff has outstanding debts to the bank of €76,227,609.17, including interest accrued to 15th October, 2013. While there was no evidence as to the exact sum currently outstanding on the loans, it is clear that the loans have been performing and the amounts due have been reducing. Nevertheless, on the basis of the evidence given to the court it is reasonable to assume that the sum outstanding on the hotel facilities and non-hotel facilities is considerably in excess of the fee payable under the Fee Agreement whether one takes the figures postulated by the plaintiffs or the defendant.

32. The defendant argues that the Fee Agreement has no meaning except in the context of redemption at par because that is the only circumstance in which there would be funds available to the plaintiffs to pay the fee. While this is an attractive argument, it seems to me to be somewhat simplistic. The agreement clearly anticipates insolvency events and events of cross default. (See clause 5) That clause does no more than reflect the state of mind of the parties who negotiated the Fee Agreement and entered into it since the parties to the agreement did not anticipate that the loans would be redeemed at par. I am satisfied that the Fee Agreement was entered into to ameliorate the position of the bank when it extended the facilities to the plaintiffs. The agreement recites that the fee “…has been calculated so as to reflect the additional interest which, in the light of the continuing and/or increased risk referred to above, the bank would reasonably require to continue and/or extend Luxor Investments facilities and those of the Principals”. Giving the words of the Fee Agreement their natural and ordinary meaning, I have to decide whether or not the claim asserted by the defendant attributes to the parties an intention which they plainly could not have had, or did not have, to use the words of Lord Hoffman in Investors Compensation Scheme when he quoted remarks of Lord Diplock made in the case of Antaios Compania Neviera S.A. v. Salen Rederierna A.B [1985] A.C. 191 at p. 201; where he said:-

“…if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense”
33. Taking the language of the Fee Agreement as written, it appears to encompass a situation where the loans will not be redeemed at par after the properties are disposed of. If there is a deficit then, under the agreement, the bank will be entitled to a minimum fee notwithstanding and the fee may be greater than the minimum fee in certain circumstances provided for in the contract. I do not believe such a reading of the contract puts a strain on the words used by the parties in the text of the agreement.
34. The question is whether or not I can, as a judge, apply rules of construction if there is no ambiguity in the language of the Fee Agreement. I believe I can. The construction of a document is not merely a consideration of the text, but involves the court in carrying out an exercise to give effect to the agreement in a way which reflects the intention of the parties as found in the document and is most closely allied to business commonsense. In Mannai Investment Co. Limited v. Eagle Star Life Assurance Co. Limited [1997] AC 749 at p. 775, Lord Hoffman said:-

“It is of course true that the law is not concerned with the speaker’s subjective intentions. But the notion that the law’s concern is therefore with the ‘meaning of his words’ conceals an important ambiguity. The ambiguity lies in a failure to distinguish between the meanings of words and the question of what would be understood as the meaning of a person who uses words. The meaning of words, as they would appear in a dictionary, and the effect of their syntactical arrangement, as it would appear in a grammar, is part of the material which we use to understand a speaker’s utterance. But it is only a part; another part is our knowledge of the background against which the utterance was made. It is that background which enables us, not only to choose the intended meaning when a word has more than one dictionary meaning but also, in the ways I have explained, to understand a speaker’s meaning, often without ambiguity, when he has used the wrong words.”(Emphasis added)
It is not suggested in this case that the wrong words were used but rather that no words were used to indicate what was to happen in the unforeseen event that the loans were redeemed at par.
35. In Jumbo King Limited v. Faithful Properties Limited [1999] 2 HKCFAR 279, while sitting as a member of the Hong Kong Court of Final Appeal, Lord Hoffman emphasised the practical approach which should be taken to the interpretation of documents, saying that:-

“The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean and this involves having regard not merely to the individual words they have used but to the agreement as a whole, the factual and legal background against which it was concluded and practical objects which it was intended to achieve. Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well. Their language may sometimes be careless and they may have said things which, if taken literally, it means something different from what they obviously intended. In ordinary life, people often express themselves infelicitously without leaving any doubt about what they meant.”
36. In seeking to come to a conclusion as to how I should resolve this case, there is another matter which is appropriate to weigh in the balance. The lender of the various facilities offered to the plaintiffs was UBIL. The Fee Agreement was entered into by its subsidiary UBSIG. But it is clear from the evidence that the Fee Agreement and the loan facilities and other security documents were all complementary with a view to achieving one end. That is to secure, as far as possible, the lender’s position with a view to the monies lent being recovered together with whatever interest was due.
37. When Mr. Gareth Fay (formerly employed by the bank) came to give evidence, he acknowledged that he was in court on foot of the subpoena as he was not willing to give a statement voluntarily because of the previous customer relationship with Mr. Rhatigan. In the course of his evidence, he stated that Mr. Rhatigan and his companies were one of the better performing clients that UBIL had and that interest was repaid on loans and capital was repaid in circumstances which were unusual during the downturn in the economy. In seventeen years that Mr. Rhatigan and his companies have been clients of the bank, not one demand for payment was made. He described how in 2012, the bank’s parent company, RBS, instructed the bank in Ireland to deleverage even though this meant selling assets below their loan value.

38. It is a well established principle that in construing contractual documents, the courts must not rewrite the bargain made by the parties. The parties to an agreement must be held to it. It is true, of course, that the Fee Agreement does not state that it was not applicable if there was a redemption at par. Such a clause or statement is not to be found in the agreement because it was simply never in the contemplation of the parties that such a situation would arise. Now that the plaintiffs are in a position to redeem the loans at par is the agreement enforceable in its terms? I think not. For some considerable time, the courts have interpreted contractual provisions in a contextual and purposive manner in order to determine their application. In Rainy Sky S.A. v. Kookmin Bank [2011] 1 WLR 2900 at p. 2908, Lord Clarke of the UK Supreme Court said:-

“The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one 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. 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.” (Emphasis added)
39. At the end of the day, the purpose of the loan facility agreements, the Fee Agreement and other security documents were to ensure that the bank was repaid its money with interest. It is true that the Fee Agreement recites that “…the basis of the fee has been calculated so as to reflect the additional interest which, in light of the continuing and/or increased risk referred to above…” the bank would require to continue the facilities to the plaintiffs. But there were no additional funds being advanced. And in the event of the property disposals creating a deficit, the fee structure provided for in the agreement would have mitigated the bank’s losses. That is what the bank was getting out of the agreement. But it was never envisaged that the bank would recover all the monies due plus interest and still be entitled to an additional fee. If the court were to make a ruling to that effect it would run counter to the true nature of the agreement. The agreement never made provision for what was to happen in the event of a redemption of the loan at par. The court is being asked to do no more at this stage than fill in the gaps in the agreement having regard to the circumstances in which it was concluded. The court can do so on the basis of the evidence given in this case. In doing so, the court is not indulging in judicial adventurism and is not in any way seeking to rewrite the terms of the Fee Agreement. If it was ever intended that the bank (or the defendant as the purchaser of the loans and the agreement) was to receive not only repayment of the borrowings in full together with interest, but also, in addition, a substantial fee, I think it would have to be clearly expressed in the Fee Agreement and it is clear that this was not done.
40. In Bromarin A.B. & Anor v. I.M.D. Investments Limited [1999] S.T.C. 301, Chadwick L.J. in the Court of Appeal stated at p. 310 :-

“The difficulty with that approach is that it is commonplace that problems of construction, in relation to commercial contracts, do arise where the circumstances which actually arise are not circumstances which the parties foresaw at the time when they made the agreement. If the parties have foreseen the circumstances which actually arise, they will normally, if properly advised, have included some provision which caters for them. What that provision may be will be a matter of negotiation in the light of an appreciation of the circumstances for which provision has to be made.
It is not, to my mind, an appropriate approach to construction to hold that, where the parties contemplated event ‘A’, and they did not contemplate event ‘B’, their agreement must be taken as applying only in event ‘A’ and cannot apply in event ‘B’. The task of the court is to decide, in the light of the agreement that the parties made, what they must have been taken to have intended in relation to the event, event ‘B’, which they did not contemplate. That is, of course, an artificial exercise, because it requires there to be attributed to the parties an intention which they did not have (as a matter of fact) because they did not appreciate the problem which needed to be addressed. But it is an exercise which the courts have been willing to undertake for as long as commercial contracts have come before them for construction. It is an exercise which requires the court to look at the whole agreement which the parties made, the words which they used and the circumstances in which they used them; and to ask what should reasonable parties be taken to have intended by the use of those words in that agreement, made in those circumstances, in relation to this event which they did not in fact foresee.” (Emphasis added)

This is the task which the court must undertake in resolving this matter.
41. Adopting that approach and having regard to what I have set out above, I would answer the question directed to be tried by Fullam J. as follows:-

The agreement dated 25th October, 2013, made between Luxor Investments Limited and Luxor Leisure Limited (the ‘UBSIG obligors’) of the one part and UBSIG (ROI) Limited of the other part (‘the UBSIG Agreement’) is not applicable or enforceable in circumstances where the plaintiffs propose to redeem their loans with the defendant at par.
42. In the circumstances it is not necessary for me to consider whether or not the Fee Agreement is void as a clog on the plaintiffs’ equity of redemption.

Danske Bank A/S trading as National Irish Bank -v- RQB Ltd & Ors

[2010] IEHC 347 (23 July 2010)

Judgment by: McGovern J.

Status of Judgment: Approved

Neutral Citation Number: [2010] IEHC 347

DEFENDANTS

JUDGMENT of Mr. Justice Brian McGovern delivered on the 23rd day of July, 2010
1. In these proceedings, the plaintiff (hereinafter referred to as “the Bank”) seeks judgment against the third named defendant in the sum of €8,876,803.16 with contractual interest thereon on foot of a guarantee dated 23rd December, 2005, to secure monies advanced by the Bank to RQB Limited. RQB Ltd. (the first named defendant) is in liquidation and the third named defendant was a director of that company since 2005. The plaintiff provided an overdraft facility to RQB Ltd. on terms set out in a facility letter of 19th December, 2005. This facility was secured by joint and several guarantees given by the third named defendant and by Paddy Kelly (the second named defendant) and Paul Pardy (the fourth named defendant). RQB Ltd. failed to comply with the terms of the facility granted, and on 22nd July, 2009, a demand for repayment of the debt was made of the first named defendant by the Bank. The first named defendant was not in a position to repay the monies advanced and by letters of demand dated 24th July, 2009, the Bank wrote to each of the guarantors, namely, the second, third and fourth named defendants, demanding immediate repayment of the sums then due, namely, €8,563,306.30, in accordance with the terms of the guarantee.

2. In this hearing, the plaintiff seeks judgment against the third named defendant, Niall McFadden. Summary judgment has been obtained by the plaintiff against the second and fourth named defendants on 12th August, 2009, and against the first named defendant on 23rd September, 2009. On 16th October, 2009, the proceedings against the third named defendant, Niall McFadden, were adjourned for plenary hearing.

3. The second, third and fourth named defendants entered into two guarantees to secure the facilities either made available to or offered to RQB Limited. The first was a guarantee of 23rd December, 2005, and the second was a guarantee of 10th September, 2008. These proceedings are brought against the second, third and fourth named defendants on foot of the 2005 guarantee. The summary judgment already obtained against the second and fourth named defendants on 12th August, 2009, was in respect of that guarantee.

4. The third named defendant claims that if he has any personal liability for the debts of the first named defendant it is on foot of the guarantee of 10th September, 2008, as it replaced the 2005 guarantee. This is denied by the plaintiff. The issue in this case is a relatively simple one, namely, whether the plaintiff is bound under the 2005 guarantee or the 2008 guarantee. It is not disputed that he executed both guarantees and that they were proper as to their form.

5. At the conclusion of the plaintiff’s case, counsel for the third named defendant informed the Court that he did not propose going into evidence. It is accepted by the parties that the principles set out in O’Toole v. Heavey [1993] 2 I.R. 544, apply. In this case, there do not appear to be any notices claiming contribution or indemnity, and since judgment has been obtained against the other defendants, it seems to me that the ruling in O’Toole and Heavey can be applied as though there was just one defendant. That rule is as follows:

“If, upon a applying for a non-suit at the conclusion of the plaintiff’s case, in a case where one defendant only has been sued, it is indicated that the defendant does not intend, if the application is refused, to go into evidence, then, in effect, the learned trial judge is being asked to determine the following question, which is: having regard to his view of the evidence of the plaintiff, whether the plaintiff has (that being the only evidence before him) established as a matter of probability the facts necessary to support a verdict in his favour. Unless he is so satisfied, he must dismiss the action; if he is so satisfied, it appears to me that he must give judgment for the plaintiff.”
Expressed in simple terms, what this means is that I have to decide whether the plaintiff has established, at the conclusion of its Case, on the balance of probability, that the third named defendant is bound by the 2005 guarantee.
Background
6. On 19th December, 2005, the plaintiff Bank issued an overdraft facility to the first named defendant (“RQB”) offering the company an overdraft facility in the sum of €12m. for the purpose of assisting with the acquisition of properties and other investments, pending the injection of investor equity. The offer contained in the facility letter was subject to the acceptance of same by RQB and to compliance with the terms and conditions set out therein. The facility letter, at clause 7 thereof, provided for security and stated:

“The overdraft facility will be secured by;

(a) Joint & Several Guarantees of €12,000,000 (Twelve million Euro) from Patrick Kelly, Niall McFadden and Paul Pardy.

Any security held now or at any future time shall be security for all the Borrowers’ liabilities to the bank (actual or contingent and whether as principal or surety).”
The terms of the offer in the facility letter were accepted by RQB and monies were drawn down against the facility. At the time of the letter of demand, dated 11th June, 2009, the outstanding liability of RQB was €8,521,006.62.
7. The 2005 facility was repayable on demand and subject to review on 21st December, 2006. At the end of 2006, the Bank had discussions with RQB and it was agreed to continue the 2005 facility on the understanding that it was repayable on demand.

8. In the early summer of 2008, RQB requested that the Bank would restructure the 2005 facility and discussions took place between the parties. On 10th June, 2008, Mr. Kenneth Dobson, Head of Corporate Banking Ireland, for the plaintiff, sent an email to Mark Buckley of the first named defendant, setting out in broad terms the way in which they were prepared to restructure the facility.

9. The restructuring of the facility involved the creation of a €2m overdraft available until 30th June, 2009, to fund business restructuring costs and a loan of €8m to restructure existing borrowings for a three-year term, expiring on 30th June, 2011. The security was stated in the email to be:

“Continuation of existing Joint and Several Personal Guarantee of shareholders (N. McF., P.K. and P.P.) – the bank will, however, agree to review these on an annual basis, and without commitment, consider a reduction in exposure and/or cancellation of same.
Floating charge over assets of RQB (this is a new security).”

10. Other matters were referred to in the email, including the provision of up to date Personal Assets Statements of the guarantors, financial covenants concerning minimum net worth and the provision of appropriate financial information.
11. Two facility letters were issued by the Bank on 7th July, 2008, in respect of a €2m overdraft and an €8m loan, but the matter was not brought to a conclusion because of objections by the fourth named defendant, Mr. Pardy, who was reducing his involvement with the first named defendant and was not willing to sign an acknowledgement that the guarantors would be bound by the 2005 guarantees in respect of such new facility.

12. Further facility letters were issued on 7th August, 2008, but, again, no agreement was concluded.

13. On 4th September, 2008, the plaintiff offered the first named defendant a loan facility of €8m and an overdraft facility of €2m, subject to the terms and conditions contained in the facility letter. The loan facility was to be secured by a Joint and Several Guarantee in the amount of €8m from the second, third and fourth named defendants, and a First Fixed and Floating Charge over assets and undertakings of the company. Clause 8 of the proposed loan facility contained conditions precedent and provided:

“Prior to utilisation of the facilities referred to at clause one above, the Bank is to be provided with Personal Asset Statements of the Guarantor. Such Personal Asset Statements are to be satisfactory to the Bank.”
Clause 11 provided that the offer was to remain open until 30th September, 2008, and would be subject to renegotiation if acceptance was not received by that date. Clause 12 provided that the facilities would be made available on completion of the security arrangements and on compliance with the provisions of clause 11 and would be subject to renegotiation if utilisation had not commenced by 30th September, 2008. The letter was stated to be supplemental to the bank’s letter of the same date in respect of the overdraft facility.
14. The overdraft facility of €2m was to be secured by Joint and Several Guarantees in that amount from the second and third named defendants (but not the fourth named defendant) and by a First Fixed and Floating Charge over the assets and undertakings of the company.

15. Clause 11 of the overdraft facility set out conditions precedent and provided that prior to utilisation of the facilities, the bank was to be provided with Personal Asset Statements of the guarantors and these had to be satisfactory the bank. Clause 13 provided that the offer would remain open until 30th September, 2008, and would be subject to renegotiation if acceptance was not received by that date. Clause 14 provided that the facilities would be made available on completion of the security arrangements and on compliance with the provisions of clause 11 and would be subject to renegotiation if utilisation had not commenced by 30th September, 2008.

16. The evidence establishes that it was intended that the 2008 guarantee would replace the 2005 guarantee. There was no controversy about this. The 2008 guarantee was signed on 10th September, 2008, by the second and third named defendants in respect of the overdraft of €2m and the second, third and fourth named defendants in respect of the €8m loan. Both were typed documents presented by the bank for the signature of the guarantors. The guarantee in respect of the overdraft contained, at the beginning, a manuscript addition which read as follows:

“This guarantee and the guarantee of €8m dated today, replaced the guarantee on the original RQB Ltd. liabilities dated 2005, as amended.”
It was initialled by the third named defendant. There was also a manuscript entry at the end of the agreement and before the signature section. This was also initialled by the third named defendant and read as follows:
“The bank shall have no recourse hereunder to the family homes of Niall McFadden and Patrick (Paddy) Kelly (within the meaning of the Family Home Protection Act 1976 (as amended from time to time).”
17. On the loan guarantee of the same date, there is a manuscript entry at the commencement of the document initialled by the third named defendant which states:
“This guarantee and the associated guarantee of €2m replaced the guarantee on the original RQB Ltd. facilities dated 2005 as amended.”
At the end of the document and before the signatures, the following words appear in manuscript:
“The bank shall have no recourse hereunder to the family homes of Niall McFadden, Patrick (Paddy) Kelly and Paul Pardy (within the meaning of the Family Home Protection Act 1976, as amended from time to time).”
That is initialled by the third and fourth named defendants.
18. In the course of his evidence, Mr. Kenneth Dobson referred to a telephone conversation which he had with Mr. Declan Cassidy, a director of RQB, on 10th September, 2008. In the course of that telephone conversation, he admits that he agreed that the manuscript amendments could be made. He even went so far as to admit that he agreed the amendments “word for word” with Mr. Cassidy. He also agreed that by 20th October, 2008, the only outstanding issue was with the second named defendant, Mr. Paddy Kelly, who had not provided a Personal Asset Statement and also had defaulted on obligations to the bank. He agreed that if the issue involving the second named defendant was resolved, they would draw down the facilities.

19. The facilities offered in the letter of 4th September, 2008, were accepted by the first named defendant some time after 10th September, 2008, and, apparently, before 30th September, 2008, which was the date up to which the offer remained open. The facilities were not drawn down or utilised by 30th September, 2008, and the plaintiff argues that this meant the provision of facilities would have to be renegotiated, as provided for in clause 14 of the facility letter. The plaintiff argues that the restructuring was not complete for that reason, and also on account of some outstanding security issues to be resolved by the second named defendant, Mr. Kelly.

20. In defending this action, the third named defendant maintains that everything that needed to be done had been done and there was no impediment to a drawdown of the facilities taking place under the September 2008 offer. When Mr. Dobson gave evidence of his telephone conversation with Mr. Declan Cassidy on 10th September, 2008, he stated that Mr. Cassidy informed him that he wanted two amendments put into the guarantees; one relating to the family home and one relating to the discharge of the 2005 guarantee. According to Mr. Dobson, Mr. Cassidy advised him that the third named defendant did not want to have two guarantees concurrent and:

“. . . wanted to be absolutely sure that the 2008 guarantee would replace the 2005 guarantee when the restructure was completed.” (Underlining added)
(Transcript 2, page 9)
He was pressed on this in cross-examination. Counsel referred him to his affidavit sworn on 8th September, 2009, in which he stated at paragraph 16;

“I say that it was at all times understood that the new guarantees would only replace the existing guarantee if and when the Proposed Facilities were drawn down.”
In evidence, Mr. Dobson said he believed that was the gist of the discussion that took place, although he could not specifically recall it. In his witness statement, he said:
“On or about 10th September, 2008, Mr. Declan Cassidy, a director of RQB Ltd., telephoned me requesting that these amendments be made to the guarantee. I was willing to agree the insertions on the basis that the Proposed Guarantees would replace the 2005 Guarantee only when the Proposed Facilities were utilised.”
Although this version of events was challenged by the third named defendant, he did not give evidence. Therefore, a great deal depends on whether or not I accept the evidence of Mr. Dobson in that regard. Although the third named defendant was not a party to this conversation, Mr. Cassidy was never called in evidence to challenge Mr. Dobson’s account.
21. Under the terms of the 2008 facility, the first named defendant was required to create a floating charge. This was done, and although there was some initial problem about its execution, it appears to have been duly executed and registered. No clear evidence was given as to the date of its registration and no record from the Companies Registration Office was produced. The third named defendant claims that the plaintiff is relying on the floating charge and that that, of itself, is evidence of the fact that the 2008 guarantee supplanted the 2005 document. The bank, for its part, claims that it is merely keeping its options open.

22. I accept that the plaintiff is keeping its options open with regard to the floating charge. But that does not, in my view, conclusively determine the issue as to whether or not the 2008 guarantee applied and supplanted the 2005 guarantee.

23. I accept the evidence of Mr. Kenneth Dobson that, after the 2008 guarantees were signed, the only issue to be resolved was the Personal Asset Statement from the second named defendant and, if this matter had been put right, a drawdown would have taken place. Mr. Dobson, in his evidence, said that it was only when the plaintiff started to arrange a drawdown that they realised there was a problem with one of the guarantors, namely, the second named defendant. In any case, no drawdown took place.
The law
24. The law on the principles of construction of commercial documents is well settled in this jurisdiction. The Irish courts have adopted the principles set out by Lord Wilberforce in Reardon Smith Line Limited v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989. At p. 995, he said:

“No contracts are made in vacuum. There is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as ‘the surrounding circumstances’ but the phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this, in turn, presupposes a knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.”
He went on to say, at p. 997:
“. . . what the court must do, it must be to place itself in thought in the same factual matrix as that in which the parties were.”
25. In Igote Limited v. Badsey Limited [2001] 4 IR 511, the Supreme Court adopted, with approval, those comments of Lord Wilberforce. At p. 515, Murphy J. stated:
“The dangers involved in exploring the background or surrounding circumstances to a document under construction and the limitations which must be placed upon the factual matrix rule were referred to in Plumb Brothers v. Dolmac (Agriculture) Limited [1984] 271 E.G. 373 by May L.J. when he stated at p. 374:

‘There has grown up a tendency to speak about construing documents in or against what is described as the ‘factual matrix’ in which the contract or documents first saw the light of day. In truth, that is only, I think, a modern way of saying what has always been a rule for a long time that, in construing a document, one must look at all of the circumstances surrounding the making of the contract at the time it was made. There is the danger, if one stresses reference to the ‘factual matrix’ that one may be influenced by what is, in truth, a finding of the subjective intention of the parties at the relevant time, instead of carrying out what I understand to be the correct exercise, namely, determining objectively the intent of the parties from the words of the documents themselves in the light of the circumstances surrounding the transaction. It is not permissible, I think, to take into account the finding of fact about what the parties intended the document to achieve when one is faced with the problem some five, ten or many years later of construing it. In deciding what the document did, in fact, achieve, all that one can look at are the general circumstances surrounding the making of the documents and in which it was made, and deduce the intention of the parties from the actual words of the document itself. The contract between the parties is what they said in the relevant document. It is not for this or any court to make a contract for the parties different from the words that the documents actually use, merely because it may be that the parties intended something different’.”
This view was expressly adopted by the court, as it had been previously by Griffin J. in Rohan Construction Limited v. Insurance Corporation of Ireland [1988] I.L.R.M. 373.
26. As to the manner in which contracts of guarantee should be construed, I accept the argument of Mr. Fanning B.L., counsel for the third named defendant, who argues that they should be construed strictly. Where a party agrees to be answerable for the debts or liabilities of another, and the document purporting to impose such liability has been proffered by a bank, as was the case here, the document must be strictly construed, and if there are any ambiguities in the document, they must be resolved against the bank. The guarantees of 2005 and 2008 do not, in their printed form, appear to have any ambiguity. The manuscript additions to the 2008 guarantees do no more than reflect the intention of the parties. The only disagreement between the parties concerns the question of whether the circumstances which were necessary to trigger the 2008 guarantees had occurred.
Application of the law to the facility letters and guarantee
27. The facility letter of 19th December, 2005, offered the first named defendant €12m by way of overdraft facilities subject to the security set out in clause 7 which was a:

“Joint and Several Guarantee of €12m (twelve million Euro) (from Patrick Kelly, Niall McFadden & Paul Pardy.
Any security held now or at any future time shall be security for all the borrowers liabilities to the bank (actual or contingent) and whether as principal or surety).”

After clause 15, the following paragraph appeared:
“No person has authority on behalf of the Bank orally to vary the terms of this letter, any variation of which must be in writing under the hand of a duly authorised signatory of the Bank. Any leniency or forbearance afforded by the Bank shall in no way be construed as prejudicing the right of the Bank under this letter.”
The facility was accepted by the first named defendant, and, by implication, the other defendants.
28. On 23rd December, 2005, guarantees were signed by the second, third and fourth named defendants in which they jointly and severally agreed:

“. . . to pay and satisfy to the Bank, on demand, all and every the sum and sums of money which now are, or shall at any time, be owing to the Bank, anywhere on any account whatsoever, whether from the principal, solely, or from the principal, jointly, with any other person or persons . . .”
29. The guarantee was limited to the sum of €12 million. Clause 2 of the guarantee agreement said that it was:
“. . . a continuing security and shall extend to cover any sum or sums of money which shall, for the time being, constitute the balance due from the Principal to the Bank upon any such account as herein before mentioned.”
Clause 3 stated:
“This guarantee shall be binding as a continuing security on us and each of us and each of our executor’s administrators and legal representatives until the expiration of three calendar months after each of us, or in the case of all or any of us dying or becoming, under disability, the executors, administrators or legal representatives of the person or persons so dying or becoming under disability shall have given to the Bank notice in writing to discontinue and determine the same.”
The third named defendant has not given any notice under that clause.
30. The 2008 guarantee was stated to be in addition to and not to be prejudiced or affected by any collateral or other security and it was stated to be in addition and not in substitution for any other guarantee for the principal given by the guarantors to the bank.

31. The facility letters of 4th September, 2008, were in broadly similar terms. One was offering a €2m overdraft and the other an €8m loan. They were both subject to the bank’s normal terms and conditions, together with the specific conditions set out in the letter. The security was to be a joint and several guarantee of the second, third and fourth named defendants for the loan, the second and third named defendants for the overdraft, and a first fixed and floating charge over the assets and undertaking of the company. It was also provided that:

“Any security held now or at any future time shall be security for all the Borrowers’ liabilities to the Bank (actual or contingent and whether as principal or surety).”
The conditions precedent provided:
“Prior to utilisation of the facilities . . . the Bank is to be provided with Personal Asset Statements of the Guarantor. Such Personal Asset Statements are to be satisfactory to the Bank.”
The offer was to remain open until 30th September, 2008, and would be subject to renegotiation if acceptance was not received by that date. It appears that acceptance was received by that date. The agreement also provided that facilities would be made available on completion of the security arrangements and on compliance with the conditions precedent and would be subject to renegotiation if utilisation had not commenced by 30th September, 2008. “Utilisation” had not commenced by 30th September, 2008, and, in fact, never commenced. The facility letter provided:
“No person has authority on behalf of the Bank, orally, to vary the terms of this letter, any variation of which must be in writing under the hand of a duly authorised signatory of the Bank. Any leniency or forbearance afforded by the Bank shall in no way be construed as prejudicing the rights of the Bank under this letter.”
In my view, there was nothing ambiguous about any of these clauses.
32. The guarantees signed on 10th September, 2008, were stated to be in addition to and not in any prejudiced or affected by any collateral or other security held by the bank. Clause 14 states:

“This Guarantee shall be in addition and not in substitution for any other guarantee for the Principal given by all or any of us to the Bank.”
It is of interest to note that clause 14 in each of the 2008 guarantees is similar, although a manuscript amendment appears to have been made and then corrected in respect of clause 14 of the guarantee given for the €8m loan. The clause had been amended so as to read:
“This Guarantee shall be in . . . substitution for any other guarantee for the principal given by all or any of us to the Bank.”
The words “. . . addition to and not in . . .” had been taken out. But they were then corrected and reinstated by the insertion of “stet” and this was initialled in the margin.
33. Construing the 2005 and 2008 guarantees and the facility letters, there does not appear to be any ambiguity and they are clear on their face. The intention of the parties can be ascertained from the language which has been used, considered in the light of the surrounding circumstances and the objects of the agreements. In attempting to ascertain the presumed intention of the parties, the courts must use an objective approach. In Analog Devices B.V. v. Zurich Insurance Company [2002] I.R. 272, Fennelly J., giving the judgment of the Supreme Court, stated at p. 294:

“Insofar as Irish law is concerned, a contract is to be interpreted objectively in accordance with the meaning of the words the parties have used. The corollary is that parol evidence is not admissible so as to add to or vary that meaning.”
Mr. Kenneth Dobson accepted, in evidence, that the 2008 guarantee was to supplant the 2005 guarantee, but only when all the outstanding security issues had been resolved and when the facilities were renegotiated, having not been drawn down or utilised by 30th September, 2008. It is quite clear from the 2005 and 2008 facility letters that no one had authority on behalf of the bank, orally, to vary the terms of the facility letters, and that any variation would have to be in writing under the hand of a duly authorised signatory of the bank. This was accepted by the company and the second, third and fourth named defendants, as directors of the first named defendant. No variation of the terms of the facility was made in writing under the hand of a duly authorised signatory of the Bank.
Conclusion
34. I am satisfied that the plaintiff had agreed that the 2008 guarantee would supplant the 2005 guarantee, but only when the restructured facilities had been drawn down and all the security had been in place. The facilities offered on 4th September, 2008, were required to be renegotiated as they had not been drawn down by 30th September, 2008. The 2005 guarantees clearly continued in respect of the facilities drawn down on foot of the offer made in the letter of 19th December, 2005. The security given in respect of those facilities continued until such time as the restructured loan was drawn down. This never took place. I accept the evidence of Mr. Dobson that when he spoke to Mr. Declan Cassidy on the telephone on 10th September, 2008, it was agreed that the 2008 guarantee would supplant the 2005 document when the restructured loan was drawn down. That was his sworn evidence and that was his evidence in an affidavit sworn by him in these proceedings. He said that it was at all times understood that the new guarantees would only replace the existing guarantee if and when the proposed facilities were drawn down. That seems to me to be entirely plausible and, indeed, likely, as it represented sound business and common sense. While the third named defendant challenged Mr. Dobson on this point, he did not go into evidence. Mr. McFadden was not a party this discussion, but Mr. Cassidy, a fellow director of the first named defendant, was. Mr. Cassidy was never called to give evidence on this point. In any event, the facility letter of 19th December, 2005, set out the security required for the original overdraft facilities which had been drawn down, including the provisions of the guarantee, and this had never been varied in writing by a duly authorised signatory of the Bank.

35. Since I accept the evidence of Mr. Dobson, and since the restructured facilities never became operative, it follows that the 2005 guarantee remained in place and the third named defendant is bound on foot of that guarantee.

36. The plaintiff is entitled to succeed and to judgment against the third named defendant for the sum claimed in these proceedings on foot of the guarantee of 23rd December, 2005.

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Jackie Greene Construction Ltd v Irish Nationwide Building Society

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Cases

Reardon Smith Line Limited v Yngvar Hansen-Tangen (The Diana Prosperity)

Chartbrook Ltd v Persimmon Homes Ltd & Ors

Rainy Sky SA & Orsd v Kookmin Bank

Oceanbulk Shipping & Trading SA v TMT Asia Ltd & Ors

Igote Ltd. v. Badsey Ltd.

Holloway & Ors -v- Damianus BV & Ors

Hayes -v- Kelleher & ors

Coonan v. A.G.

The Law Society of Ireland v The Motor Insurers’ Bureau of Ireland

Jackie Greene Construction Ltd v Irish Nationwide Building Society

Luxor Investments Ltd & ors -v- Beltany Property Finance Ltd

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