#5806 - Interpretation Of Terms - Irish Contract Law

Interpretation of the Terms of Contracts

Investors Compensation Scheme v West Bromwich Building Society (HoL 1997)

Facts

• A number of investors took out mortgages on their homes to invest money pursuant to financial advice, which resulted in their suffering large losses, and sought compensation from the plaintiffs, in exchange for which they assigned them the right to sue their financial advisers.

• Clause 3 (b) read that the benefits of “Any claim (whether arising in recission for undue influence or otherwise)...in which you claim an abatement of sums which you would otherwise have to repay” would remain with the investors.

• The argument was whether this reserved only the claim to an abatement of repayments arising out of recission for undue influence, or all abatements of repayments.

Issue

• Interpretation – Primacy of Parties' Intentions - Meaning of Clause 3 (b)

Judgment

• Lord Goff of Chieveley (concurring – fully with Lord Hoffman)

• Lord Lloyd of Berwick (dissenting)

• A useful means of ascertaining the meaning of this contract is to put oneself in the position of the ordinary person of the class to which it was addressed, i.e. the ordinary investor – this would indicate that the clause meant that the investor would retain his right to sue for a reduction of the mortgage debt.

• There is no particular problem with the bracketed words being redundant – they bear one straightforward meaning and there is no need to adopt a purposive reading (especially where the purpose can not be identified with reasonable certainty.)

• For the construction to be rejected by virtue of its legal and commercial consequences it would have to be extraordinary, very unreasonable or lead to a ridiculous result – in this case the consequences fall far short of it, indeed they potentially have rational bases.

• Lord Hoffman (concurring)

• In construing contractual documents, the court should aim to find the meaning which the document would convey to a reasonable person having all the background knowledge reasonably available to the parties, including anything that would affect how a reasonable man would have understood it.

• The court is not obliged to ascribe to the parties an intention which plainly they could not have had, and can decide whether the parties have made mistakes of meaning or syntax – however the law will not easily accept that linguistic mistakes have been made.

• The law excludes from consideration the previous negotiations of the parties and their declarations of subjective intent.

• The explanatory note would be read by laymen and the claim form by a lawyer – the clause was evidently intended to prevent lawyers from seeking to make out that the reduction in repayments was a claim, when it would not be so regarded by a layperson.

• The bracketed words may have an ordinary meaning but are used in an unnatural way – thus the court must choose between the unnatural meanings – the most likely meaning to fit the objective intentions of the parties is that the rights reserved are only those that arise out of recission for undue influence.

• Lord Hope of Craighead (concurring)

• Lord Clyde (concurring)

Analog Devices BV v Zurich Insurance Co (SC 2005)

Facts

• The plaintiffs suffered financial loss due to the negligence of one of their employees in maintaining their equipment.

• The defendants (insurers of the plaintiffs) refused to pay, pointing to an exemption clause which exempted them from liability for errors in faulty workmanship, processing or manufacturing and contamination and pollution, but not expressly errors in maintenance.

• It was common practice in the industry to expressly exempt liability for negligent maintenance.

Issue

• Interpretation – Primacy of Parties' Intentions

Judgment

• Denham J (concurring)

• Hardiman J (concurring)

• Geoghegan J (concurring)

• ICS v West Brom BS adopted – In construing a contract, the court must give effect to the intentions of the parties – these are to be ascertained objectively from the words used in the policies and taking into consideration the surrounding circumstances.

• In considering the surrounding circumstances, the court is entitled to consider references to 'maintenance' in standard exclusion clauses in other policies used by the insurance industry.

• The exclusion clauses in both policies related relating to contamination and pollution were intended to exclude only environmental damage.

Igote v Badsley (SC 2001)

Facts

• The plaintiffs were the owners of shares in the defendant company and they claimed that an agreement that “the company shall distribute at least 40,000 during one share period” to the first subscriber i.e. the plaintiffs, amounted to a contractual obligation.

• The defendants claimed that this referred to dividends only.

Issue

• Interpretation – Parol Evidence Rule

Judgment

• Keane CJ (concurring)

• Denham J (concurring)

• Murphy J

• Contracts are construed so as to give effect to the intentions of the parties as revealed by the words used in the contract.

• These words must be read with the surrounding circumstances in mind – however this does not mean that the subjective intentions of the parties should be taken into account when construing the contract.

• The complicated background (arising out of the parties' desire to avoid liability for tax) to the case makes it of limited use in construing the words.

• The word 'distribute' suggests that the payment is meant to be a dividend rather than a royalty.

• The payment is also mentioned in the section governing dividends and the mechanics of its allocation also suggest it is a dividend.

Express Terms

Schawel v Reade (HoL 1912)

Facts

• The plaintiff sought to buy a horse from the defendant, who showed a horse to the plaintiff and promised him that the horse was perfectly sound.

• The plaintiff, who trusted the defendant, bought the horse and a later examination showed that the horse was not fit for purpose.

Issue

• Express Terms – Statements made during negotiations

Judgment

• Lord MacNaghten

• The statement was A) made for the purpose of the sale and B) the plaintiff acted upon it, thus it was a warranty.

• Lord Atkinson

• If a statement A) is made and acted upon and B) made with intent to bring about the sale, it is a warranty.

• That is what happened in this case.

• Lord Moulton (concurred)

Oscar Chess v Williams (CA 1956)

Facts

• The plaintiffs were in negotiations with the defendants to sell them a new car.

• The plaintiffs agreed to take in part exchange what the defendants alleged was a 1948 Morris Minor.

• They later discovered that the car was in fact a 1939 model and sued for the difference in value, claiming that the model of the car was a term of the contract.

Issue

• Express Terms – Statements made in the course of negotiations

Judgment

• Denning LJ

• Where the seller states a fact which A) should be in his own knowledge and B) of which the buyer is ignorant, C) intending the buyer should act on it and the buyer does so, then it is easy to acknowledge such a term in the contact.

• In this case, both the buyer and seller were relying on the information in the registration book which showed the car to be a 1948 model – it is unlikely that the seller would have agreed to bind himself to the statement.

• Hodson LJ

• In this case the statement made by the defendant was on a matter of which he had no specialist knowledge and on which the buyer would be expected to have an opinion and exercise judgment i.e. the plaintiffs were not relying on the defendant's statement.

• This is not a decisive test, but as no other evidence was adduced as to whether the statement was meant to be viewed as an accurate one, then it can not be a term of the contract.

• Morris LJ (dissenting)

• The statement as to the model of the car was an essential term of the contract – it regarded a vitally important matter, it described the subject-matter of the contract and it directed the parties to, and was the basis of, their agreement.

Bentley Productions v Harold Smith (Motors) (CA 1965)

Facts

• The plaintiff told the defendants that he wished to purchase from them a 'well-vetted' car and pursuant to that request they offered him a car which they stated had only 20,000 miles on the clock, which matched the number on the odometer.

• The plaintiff bought the car and immediately encountered trouble with.

• He sued the defendants for breach of warranty.

Issue

• Express Terms – Statements made during negotiations

Judgment

• Lord Denning M.R.

• If a representation is made during negotiations A) for the purposes of inducing the other party to act on it, and B) the other party does act upon it, that is prima facie grounds for holding it to be a term of the contract.

• However, this can be rebutted if the person who makes the representation can show A) that they were innocent in making the representation and B) it would not be reasonable in the circumstances for him to be bound by it.

• The statement made was a fact that should have been in the defendant's knowledge and the defendant made it without any foundation – thus he is bound by it.

• Danckwerts LJ (concurred)

• Salmon LJ (concurred)

Carey v Independent Newspapers (HC 2003)

Facts

• The plaintiff was employed by the Evening Herald, and during the negotiations for the job, she indicated that, as a result of her young children, she would have to work early morning hours from home.

• The editor agreed to this and gave her the job, but after his departure her employment was terminated as a result of being unable to work the hours in...