Interpretation and Rectification of Contract

Interpretation and Rectification of Contract

• Focus: Contract interpretation/construction and why it's necessary
• Interpretation: Courts determine the meaning of a contract term using the objective test
• Objective test: The meaning a reasonable person would understand from the document, per Lord Hoffman in ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896
• Not a repairs facility: The objective test isn't about resolving a specific problem, but establishing the meaning.
• Rectification: A process to fix a contract if the written terms don't reflect the parties' agreed intentions.

Two Approaches to Interpretation

• (1) Literal Approach*

• What the contract says: The literal words and their ordinary meaning are used.

• Party knowledge and surrounding circumstances: Court considers what parties knew and the context, per Bank of Scotland v Dunedin Properties (1998 SC 657). (Literal meaning plus context)

• Contextualism: Interpretation within the broader context of the contract, including prior communications, per Lord Hoffman in ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896

• (2) Factual Matrix/Unitary Approach*

• Purpose of the contract: Focuses on the underlying purpose of the contract.

• Facts known to parties: Relevant facts known to them when the contract was signed, per Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, Reardon Smith case. (The facts at the point of contracting and surrounding circumstances).

• Prior communings: Communications between parties before the contract is essential (Facts known to parties at time of contracting and surrounding circumstances).

• Commercial common sense: The interpretation must be practical and sensible within the commercial context, as seen in more modern cases like Arnold v Britton [2015] UKSC 36 and Wood v Capita [2017] UKSC 24

• Unitary approach: Modern approach combining the above, per leading cases.

Factual Matrix

• (1) Whole commercial context:* Understanding the broader context surrounding the contract, as seen in Arnold v Britton [2015] UKSC 36 and Wood v Capita [2017] UKSC 24.
• (2) Commercially sensible:* Court must interpret the contract reasonably, given the commercial context. Cases: R&J Dempster v Motherwell Bridge 1964 SC 308 and Rainy Sky SA v Kookmin Bank [2011] UKSC 50.
• (3) Prior Communings:* Considering what was said/communicated between the parties before the actual contract was signed. Case:Bank of Scotland v Dunedin Properties 1998 SC 657 and Chartbrook v Persimmon Homes [2009] UKHL 38.

Factual Matrix = Now Unitary Approach

• No ambiguity required
• Natural/ordinary meaning
• Relevant clauses
• Purpose, facts, and circumstances of the contract.
• Commercial sense
• Excluding subjective intentions.

Other Approaches to Interpretation

• (3) Iterative Approach:*
• Considering rival meanings and using business common sense in interpretation.
• Case example: Wood v Capita Insurance Services [2017] UKSC 24

Further Approaches to Interpretation - Contra Proferentem

• (4) Contra Proferentem:* Interpreting ambiguous clauses against the party who introduced them.
• Applied in contracts with standard terms, and not negotiated.
• Parties seeking to rely on a contract clause must have it interpreted most favourably to the other party. The clause being interpreted unfavourably.
• Example: Life Association of Scotland v Foster (1873) 11 Μ. 351

Rectification

• Problem: Terms don't match original agreement.
• Solution: Court order correcting the document to align with original agreement.
• Legislation: ss8-9 Law Reform (Miscellaneous Provisions) (Scotland) Act 1985, a contract document failing to achieve the expressed intentions of the parties at the time the contract was made
• Requirement: The document fails to express the parties' common intention at the date when it was made (the s.8(1)(a) test).
• Remedies: Court can specify how the document will be updated to satisfy common intention.
• Third-party protection: safeguards those not involved in the initial agreement.

This quiz explores the principles of contract interpretation and rectification. Key concepts include the objective test as established by case law and the literal and contextual approaches to understanding contract terms. Test your knowledge on how courts ascertain the meaning of contracts and the rectification process.