[1] 406; Sir Christopher Staughton, ‘How do the

1 Arnold v Britton 2015
UKSC 36, 2015 AC 1619.

2 See Generally D. McLauchlan, ‘The lingering confusion and
uncertainty in the law of contract interpretation’ 2015 LMCLQ 406, 406; Sir
Christopher Staughton, ‘How do the courts interpret commercial contracts?’
(1999) 58 CLJ 303.

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3 Hugh Beale, Chitty on Contracts in H Beale
(ed), Chitty on Contracts (32nd edn, Sweet &
Maxwell 2015) ch 1, paras 1.039-1.056;
Carter v Boehm (1766) 3 Burrow
1905, 97 ER 1162.

4 Interfoto Picture
Library Ltd v Stilletto Visual
Programmes Ltd 1989 1 QB 433 (CA) 439 (Bingham LJ).

5 ING Bank NV v Ros Roca SA 2011 EWCA Civ 353, 2012
1 WLR 472 110.

6 Antaios Compania
Naviera SA v Salen Rederierna AB, The Antaios 1985 AC 191 (HL) 201; Jackson v Dear 2013 EWCA Civ 89 15.

7 Walford v Miles 1992 2 AC 128 (HL).

8 Pink Floyd Music Ltd v EMI Records Ltd 2010 EWCA Civ 1429,
2011 1 WLR 770; Lord Neuberger in Arnold
v Britton 2015 UKSC 36, 2015
AC 1619.

9 Lord Denning referencing Courtney
& Fairbairn Ltd v Tolaini
Brothers (Hotels) Ltd 1975 1 WLR 297 (CA), in Walford v Miles 1992 2
AC 128 (HL).

10 D&G Cars Ltd v Essex Police Authority 2015 EWHC 226
(QB).

11 Petromec Inc v Petroleo Brasileiro SA Petrobras (No.3)
2005 EWCA Civ 891, 2006 1 Lloyd’s Rep 121 good faith was contained in a
contract, compare to  Walford v Miles 1992 2 AC 128 (HL) where the contract was yet to be
performed, Astor Management AG v Atalaya Mining Plc 2017 EWHC 425
(Comm), 2017 1 Lloyd’s Rep 476.

12 Antaios Compania
Naviera SA v Salen Rederierna AB, The
Antaios 1985 AC 191 (HL) 201; Rainy
Sky v Kookmin Bank 2011 UKSC
50, 2011 1 WLR 2900 21.

13 Springwell Navigation
Corporation v JP Morgan Chase Bank
2010 EWCA 1221; S. Whittaker, ‘Good Faith, Implied Terms and Commercial Contracts’
(2013) 129 LQR  463, 469.

14 MSC Mediterranean
Shipping Co SA v Cottonex Anstalt
2015 EWHC 283 (Comm), 2015 1 CLC 143 (Leggatt J); Interfoto Picture Library Ltd v
Stilletto Visual Programmes Ltd 1989 1 QB 433 (CA) 439 (Bingham LJ); Marks and Spencer plc v BNP Paribas
Securities Services Trust Co (Jersey) Ltd 2015 UKSC 72, 2016
AC 742 21; A. Kramer, ‘Common Sense Principles
of Contract Interpretation (2003) 23 OJLS 173.

15 Lord Justice Leggatt, ‘Contractual Duties of Good Faith’ (Commercial
Bar Association, 18 October 2016)
https://www.judiciary.gov.uk/announcements/speech-by-mr-justice-leggatt-contractual-duties-of-good-faith/ para 26

>
accessed 15 November 2017.

16 Lord Sumption, ‘A Question of
Taste: The Supreme Court and the Interpretation of Contracts’ (Harris Society
Annual Lecture, Keble College, Oxford, May 2017) https://www.supremecourt.uk/docs/speech-170508.pdf. >accessed 15 November 2017.

17 Lord Neuberger at the Banking Services
and Finance Law Association Conference, Queenstown, ‘The impact of pre- and
post-contractual conduct on contractual interpretation’ (11 August 2014) https://www.supremecourt.uk/docs/speech-140811.pdf.
>accessed 15 November 2017.

18 Yam Seng Pte Ltd v International
Trade Corp Ltd 2013 EWHC 111 (QB), 2013 1 All ER (Comm) 1321 123.

19 Procter & Gamble Co v Svenska Cellulosa
Aktiebolaget SCA 2012 EWCA Civ 1413; ING
Bank NV v Ros Roca SA 2011 EWCA
Civ 353, 2012 1 WLR 472 110:, Firm PI
1 Ltd v Zurich Australian Insurance
2014 NZSC 147 90.

20 US Bank Trustees Ltd v Titan
Europe 2007-1 (NHP) Ltd 2014
EWHC 1189 (Ch) 25.

21 Wood v Capita 2017 UKSC
24, 2017 2 WLR 1095; Mannai Investment
Co Ltd v Eagle Star Life Assurance Co
Ltd 1997 AC 749 (HL) 767:focused on the reasonable man perspective, contrast
to Investors Compensation Scheme Ltd v
West Bromwich Building Society (No.1)
1998 1 WLR 896 (HL) 912 – whereby Lord Hoffman said interpretation should
involve looking at all of the knowledge that would have been available to the
parties; BMA Special Opportunity Hub Fund
Ltd & Ors v African Minerals
Finance Ltd 2013 EWCA Civ 416 24.

22 Hugh Beale, Chitty on Contracts in
H Beale (ed), Chitty on Contracts
(32nd edn, Sweet & Maxwell 2015) ch 1.

23 P. Davies, ‘Interpreting
Commercial Contracts: A Case of Ambiguity?’ 2012 LMCLQ 26, 27; contrast to Multi-Link Leisure Developments Ltd v North Lanarkshire Council 2010 UKSC
47, 2011 SC (UKSC) 53 11 and Rainy Sky v Kookmin Bank 2011 UKSC 50, 2011 1 WLR 2900 21.

24 Ford v Beech (1848) 11 QB
852, 866

25 Prenn v Simmonds 1971 1
WLR 1381 (HL) 1381-84.

26 Ewan McKendrick, Contract Law: Text, Cases, and Materials
(7th edn, OUP 2016).

27 Wood v Capita 2017 UKSC
24, 2017 2 WLR 1095; A Burrows, A
Casebook on Contract (5th edn, Hart 2016) 254.

28 Lord Justice Lewison, The
Interpretation of  Contracts (6th
edn, Sweet & Maxwell 2015) Ch 2 Section 7

29 Arnold v Britton 2015
UKSC 36, 2015 AC 1619.

30 Lord Grabiner, ‘The iterative
process of contractual interpretation’ (2012) 128 LQR 41 55-60; this is pre Arnold v Britton.

31 Arnold v Britton 2015
UKSC 36, 2015 AC 1619.

32 US Bank Trustees Ltd v Titan
Europe 2007-1 (NHP) Ltd 2014 EWHC 1189 (Ch) 25.

33 Contrast to Chartbrook v Persimmon
2009 UKHL 38, 2009 1 AC 1101; A. Shaw-Mellors, ‘Negligence Construction:
Does Anything Remain of Canada Steamship?’ (2017) 7 JBL 610; Sir Richard Buxton
in ‘”Construction” and “Rectification” after Chartbrook’ (2010) 69 CLJ 253,
256; Andrew Burrows, “Construction and Rectification” in Andrew Burrows and Edwin
Peel (eds), Contract Terms (OUP 2007)
77, 99.

34 Arnold v Britton 2015 UKSC 36, 2015 AC 1619; Oceanbulk Shipping and Trading SA v TMT Asia Ltd 2010 UKSC
44; 2011 1 A.C. 662
(earlier).

35 Re Sigma Finance Corpn 2009 UKSC 2, 2010 1 All ER 571 12
(Lord Mance) applied in Wood v Capita 2017 UKSC 24, 2017 2 WLR
1095.

36 Arnold v Britton 2015 UKSC 36, 2015 AC 1619; Investors Compensation Scheme Ltd v West Bromwich Building Society (No.1) 1998 1 WLR 896 (HL) 912.

37 Arnold v Britton 2015
UKSC 36.

38 Prenn v Simmonds
1971 1 WLR 1381 (HL); C. Mitchell, ‘Contract Interpretation: Pragmatism,
Principle, and the Prior Negotiations Rule’ (2010) 26 JCL 134.

39 Investors
Compensation Scheme Ltd v West
Bromwich Building Society (No.1) 1998 1 WLR 896 (HL) 912 (Lord Hoffmann)-
relevant, but not binding. Compare with Emirates
Trading Agency LLC v Prime Mineral
Exports Pte Ltd 2014 EWHC 2104 (Comm), 2015 1 WLR 1145.

40 Criminal Justice Act 2003.

41 Yam Seng Pte Ltd v International Trade Corp Ltd 2013 EWHC 111 (QB), 2013 1 All ER
(Comm) 132; Carter v Boehm (1766) 3 Burrow 1905, 97 ER 1162; Hugh Beale, Chitty on Contracts in H Beale
(ed), Chitty on Contracts (32nd edn, Sweet &
Maxwell 2015) ch 1, paras 1.039-1.056.

42 Interfoto Picture Library Ltd v Stilletto
Visual Programmes Ltd 1989 1 QB 433 (CA) 439 (Bingham LJ); Edward
Granger, ‘Sweating Over an Implied Duty of Good Faith’ 2013 LMCLQ 418; Unfair Contract Terms Act 1977, Consumer Rights Act 2015,
Germany and Frances use of Good faith; Mid
Essex Hospital Services NHS Trust v Compass
Group UK and Ireland Ltd (t/a Medirest) 2013 EWCA Civ 200, 2013 BLR 265
109.

43 Yam Seng Pte Ltd v
International Trade Corp Ltd 2013 EWHC 111 (QB), 2013 1 All ER (Comm)
132

44
Dany Lions
Ltd v Bristol Cars Ltd
2014 EWHC 817
(QB) compare Shaker v Vistajet 2012 EWHC 1329 (Comm).

45 Yam Seng Pte Ltd v
International Trade Corp Ltd 2013 EWHC 111 (QB), 2013 1 All ER (Comm)
132; Novus Aviation Ltd v Alubaf Arab International Bank BSC(c) 2016 EWHC 1575 (Comm), 2017 1
BCLC 414 60.

46 Bhasin v Hrynew 2014 SCC
71, 2014 3 SCR 495.

47 Z. Xing Tan, ‘Keeping Faith with
Good Faith?  The Evolving Trajectory
post-Yam Seng and Bhasin’ (2016) 5 JBL 420.

48 Hugh Collins, ‘Is a Relational
Contract a Legal Concept?’  in S.
Degeling et al (eds), Contract in Commercial Law (Thomson Reuters 2016);
Lord Justice Lewison, The
Interpretation of Contracts (6th edn, Sweet & Maxwell 2015); D
Campbell, ‘Good Faith and the Ubiquity of the ‘Relational’ Contract’ (2014) 77
MLR 475.

49 Arnold v Britton 2015
UKSC 36, 2015 AC 1619.

In essence, contractual interpretation is strongly influenced
by subjectivity. The vagueness of the law means that parties are not sure of
their position. Not only would this deter commercial parties from using UK
Judiciary, but would essentially cause the commercial industry to suffer-
proving vast implications. Looking outwardly, there is a requirement for a
balance between focusing on the words of the contract, and taking into account
the context- without being distracted by irrelevant considerations. Therefore, Arnold v Britton49
should be interpreted by the minority position, to give rise to the contract
holistically and to solve the long established argument on which approach
should be recognised.

 

By adding requirements such as relational contracts as
suggested by Leggatt J, this just increases uncertainty and confusion amongst
the parties, making the law more difficult to follow. Relational contracts are
a form of long term contract. The term has no definition, and there is yet to
be convincing evidence that relational contracts mean anything, because surely
all contracts are relational, so how is this term different to normal
contracts?48

 

Reinforcing the better view, it should be left to the parties’
discretion- as they will act in their own interests. While it is understandable
that Leggatt J tried to shift English Law into a more modern position, it
doesn’t seem to be necessary. Parties are already heavily governed through many
laws and regulations- therefore, the law should allow the parties some room to
move freely without feeling restricted.

 

The Supreme
Court in the Canadian case of Bhasin v Hrynew recognised good faith as an
obligating principle.46
This intensified Leggatt J’s viewpoint on good faith, as stated in Yam Seng Pte Ltd v International Trade Corp
Ltd , which Leggatt J further enforced in his decision in MSC Mediterranean Shipping Co SA v Cottonex Anstalt. While Leggatt J’s approach appears to be more contextually
focused, Bhasin v Hrynew seeks to
impose good faith as a more ‘general organising principle’. Therefore, there is
a flaw with Leggatt J’s reasoning, as there is yet to be clear evidence of
supporting good faith as an enforceable standing rule.47

 

Yam Seng Pte Ltd v International Trade Corp Ltd was a springboard case that allowed for subsequent
discussion in the context of good faith.41
Leggatt J, who was the judge in this case, endorsed the position the English
Law should adopt as being more welcoming to implying a good faith obligation
into contracts- therefore following the examples set by other jurisdictions and
other general obligations, where there are pockets of good faith elements in
English Law.42 His reasoning for this is
that commercial parties have shared values and norms of behaviour that they all
recognise.43 In one sense, it would be
logical if implied terms were adopted as it would solve the lingering issue of
Good faiths questionable role in English Law, without it becoming explicitly
governed by the courts.44
However it is realistic for parties to have these expectations? It is highly
subjective and presumptuous to impose this on all commercial parties, because
the courts are focusing on what they think the parties need, instead of what
they want- distancing from party autonomy.45

Implied Terms in Good Faith

 

A solution to this is that courts should be able to use the
pre negotiation stage as evidence during contractual interpretations. Not only
would this allow courts to understand the intentions of the parties without
guessing, but it will also mean the contract will remain how the parties
intended.38 The only issue is that, there
needs to be allowance for things to be said that will not be binding. This is
supported by the Lord Hoffman’s Third Principle of Contractual Interpretation.39
The reasons for not including pre contractual negotiations were quite pragmatic
in that, at the negotiation stage, parties are acting in the own interests and
are allowed to change their mind on what they have said. Therefore, I would
suggest a balanced approach, whereby courts should be able to consider the
negotiations, without it being binding- therefore acting as mitigating and
aggravating factors, as sometimes seen in criminal law.40

 

It is important to note that Investors Compensation Scheme v West
Bromwich Building Society takes a more contextual approach, in contrast to Arnold v Britton.36
While Arnold v Britton was able to be loyal to the party’s intentions and not
rewrite the contract, it did not account for the harsh commercial consequences-
unlike Investors Compensation Scheme v West Bromwich Building Society. This
raises the question, whether a balance between the approaches used in both
cases would be most appropriate? I agree with Arnold v Britton, in
taking a hands off approach in order to ensure party autonomy, however there
should not be a total disregard for commercial consequences as this would
create absurd results in the commercial industry- therefore if the approach
taken in Wood v Capita and Investors Compensation
Scheme v West Bromwich Building
Society would lessen this, then I accept this position would be most appropriate
for courts to adapt.37

 

In contrast, Wood v Capita35
considers both by suggesting that the courts starting point could be
considering the background and broader context of the contract- as long as the
words are also taken into account. The danger of that is arguably, by the time
courts heard evidence or thought about the surrounding circumstances, the view
of relevant language and what is commercially sensible, is tainted at that
point. Furthermore, this case endorsed the use of the iterative process- courts
should look at the terms of the contract in the context of the contract
generally. This could amount to a more functional and viable approach.

 

Furthermore, Lord Neuberger summarised seven principles in
regards to trying to equalize commercial consequences along with language.34
It attempts to provide justification for departing from the natural meaning.
However, this is still problematic. For instance, with the second and fourth
factor, it touches upon that the less clear the words are or poorly drafted,
the courts should think more broadly. However, even if this is the case with
the contract, this does not allow the court to go looking for problems. This is
the position with other areas of the law such as good faith. Courts must not invent
ambiguities in order to reach an interpretation that is more favourable. Even
if the contract is flawed in other areas, the courts cannot change everything
due to that particular flaw if it has nothing to do with that specific issue
during interpretation.

 

In Arnold v Britton, there were conflicting
approaches. 31 Lord Carnworth gave a
dissenting judgement, as he held the minority position, whereby the Supreme
Court judge was motivated by the need to avoid harsh commercial consequences,
notwithstanding that the contract was clear. He suggested that the courts have
a responsibility to ensure that clauses not only give effect to the intended
purpose, but also to guard against unintended burdens, therefore promoting a
more remedial approach- which could be regarded as a more balanced process. In
comparison to this, the majority position placed utmost importance on the
wording of the contract, while not getting distracted by the consequential
outcome. On one hand, this judgement is logical as contractual interpretation
is not a license for courts to rewrite the contract, according to how it thinks
it should be written.32
However, a more general approach should be considered, as the isolated wording
may not give rise to the whole contract.33

 

Iterative approach is interpreting the contract holistically,
to understand the meaning of a term more accurately.24 I
accept disputes between parties on their opinion of what the interpretation
amounts to could lead to further appeals and litigation costs, hence why courts
may result in considering the wider context, in order to understand intentions
more clearly. In addition to this, courts only see the dispute, not the
negotiation process between the parties when agreeing the terms- this is
because any pre contractual evidence is inadmissible.25 There
is a risk that this will influence and alter the courts focus when arriving at
a solution. However, there is a fine line that courts should remain mindful of
going beyond the wording of the contract, that it is then ignored.26 Courts
will concentrate on getting the party out of a bad bargain and on commercial consequences,
to make things fairer.27
It can be gathered, that courts place a lot of importance on fairness- but
ignoring the parties is ironically unfair.28
Furthermore, parties not knowing how much weight will be placed on common sense
and the factual element, adds to more uncertainty.29
Therefore, from my perspective, ambiguous terms of the contract requires
particular attention, however courts need to impose limitations on its
functions to ensure party autonomy and accuracy.30

 

Furthermore, continuing my previous point, perhaps courts
should adopt a more iterative approach when interpreting a contract. The
general position is that where the wording is unambiguous, the clause should be
applied.22 On one hand, it is
understandable that where the contract holds a mass of ambiguity, the courts
may have to take wider ranging factors into consideration during
interpretation- but does this not then further distance the court from the
initial intention of the parties, by essentially guessing the meaning?23

Ambiguity

 

In contrast to this, Leggatt LJ delivered a lecture to the
Commercial Bar Association where he suggested that commercial parties actually
favour good faith.15 Leggatt
LJ, states that he sees it is a mistake to see contracting as an essential
adversarial activity- it is wrong for one party to gain, and the other to
automatically lose- therefore suggesting that courts should rewrite the
contract according to this. This view is inconsistent with Lord Sumption’s
lecture, where he held that judges are not in a well-informed position to
confirm what amounts to commercial common sense, mainly due to their decisions being
significantly influenced by the dispute.16 Further
supported by Lord Neuberger’s lecture 2014, which advocated that judges should
not decide what is commercially sensible, due to judges being fairly remote
from commercial matters.17  Once again, judge’s notion of common sense is
dictated by fairness- even though it holds no relevance. The better view is
that, parties enter into a contract with a spirited competitive cooperation and
a view of serving their own interests- therefore, they should feel free to act
in any manner they wish. In Yam Seng Pte
Ltd v International Trade Corp Ltd,
Leggatt J said numerous points on the first reading, which is fairly
inconsistent with this.18
What is commercially absurd to one person, will not necessarily be absurd to
another person, it a subjective concept.19
Furthermore, if one party during the formation of the contract has been
particularly prudent and negotiated themselves a good bargain, why should there
be a risk that the courts then attempt to rewrite the agreed contract?20
Judges should use tools in analysing the contract to aid interpretation, but the
wording of the contract is the starting point.21

 

Commercial common sense, similarly to good faith, it is not
recognised definitively, and there is not a universally understood approach of applying
it to the contract.9 However, surely
contracting parties are better at knowing what is more commercially sensible,
to the point that they would then reflect this in their written contract?10
Hence, removing any uncertainty the parties have.11 The
courts heighten the risk of rewriting contracts entirely, and beyond the
limitations of their functions, if they see themselves as best at understanding
commercial common sense.12
In comparison to good faith, The Court of Appeal stressed that there is a
danger of recognising good faith as it would undermine what the parties have
agreed.13
Therefore, good faith would be too powerful if it was to be invoked too
readily, resulting in the courts consequently rewriting the contract that
extends further than the parties intentions- which is not upholding party
autonomy.14 Parties’ main interest is
profit- shareholders want dividends generated by profit. There is conflicting commitments,
as this puts pressure on managers to make decisions to ensure profit, but the
manager also has to act in towards the other party in the contract. This makes
decision making very difficult, and either way could be problematic- if the
manager is overcautious in regards to good faith, they will not be answerable
to the Board. So courts need to ask themselves, whether interpreting the
contract in a way that it distances it from the purpose, that in turn it would
allow the commercial industry to endure the results?

 

Commercial common sense is very subjective, as seen when
courts attempt to interpret contractual agreements on the basis of preventing
harsh or unfair consequences. From a pragmatic point of view, arguably the
parties should be in favour of courts using commercial common sense, as it
means that the courts are reflecting current commercial laws. Moreover, many
authorities and judges place commercial common sense with great importance.8 However
it is submitted that, commercial sensibility is one notion of many, so it is
questionable whether judges are the correct body to decide.

Commercial Common Sense

 

This essay will argue, with reference to good faith, that
courts have given themselves no limitations with interpretation, that it lets
its own subjective views rewrite the contract.5 I
will pursue this argument in regards to commercial common sense- whether this
approach would then dominate the direction judges will adopt in the future, and
essentially becoming a distraction and taking the judges away from fulfilling
its purpose.6 I will also consider
ambiguity, in that could there be a justified reasoning behind departing from
the wording of the contract, without it becoming completely discounted. Finally,
I will argue in reference to good faith, whether implied terms should be
explicitly regulated and interpreted in a way that was not intended.7

 

The English Law approach in resolving commercial contract
disputes is based on factual interpretation, prompted by the recent case of Arnold v Britton.1 Despite
this, historically there has been frequent movement between, on one hand,
developing a more accurate based decision built on the terms present in the
contract, to then leaning towards a certainty focused interpretation- by
considering the commercial context. Due to the courts not having an agreed
approach to interpretation, it has in turn created inconsistent outcomes in
cases, and uncertainty amongst commercial parties.2
This is as a consequence of the subjectivity of which of the concepts used is
most appropriate. This has been particularly apparent with the questionable role
of good faith, which is currently not recognised in English Law.3 This
is a result of conflicting views- courts have spent a considerable amount of
time on defining and deciding whether to impose a good faith obligation, even
where parties do not want it. Therefore, how can the obligation be imposed if
there is nothing for parties to be measured against?4