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Graham Huntley’s article published in New Law Journal: Seeking clarity

By Signature Litigation
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Signature Litigation
Signature Litigation

There’s just one rule of construction, says Graham Huntley

It is often said that the construction of written contracts is a question of law. The proposition is however simplistic and to that extent incorrect.

It was established law in the mid-19th century that questions of construction inevitably depended upon matters of fact. The distinction was perhaps clearer because at that time the factual and legal components of the construction question were entrusted to different decision-makers—the judge and jury respectively. With the demise of the jury role, the English courts appeared to become occupied with the application of rules of construction for the trial judge to follow.

COMMON SENSE

Whether or not as a consequence of the increasingly important factual components of commercial contracts, by the mid-1990s the English courts clearly felt the need to put to one side the proposition that the issue in hand was simply one of law. The landmark decision in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98, [1998] 1 WLR 896, signalled the simplicity of the test that in matters of construction the courts were concerned to ascertain the “meaning which the document would convey to a reasonable person” (ie an objective test) by applying “the common sense principles by which any serious utterance would be interpreted in ordinary life”.

The Supreme Court returned to the matter two years ago in Cusack v Harrow London Borough Council [2013] UKSC 40, [2013] 4 All ER 97, making plain that gone were the former “rules” of construction—at best they are now to be understood as principles or guidelines to the common sense understanding of the reasonable person.

More importantly, the observation of Lord Hoffmann in the ICS case that construction is “highly sensitive to the context of, and background to, the particular utterance” has seen some much needed development both in this and other jurisdictions of the importance of the factual context.

UNITARY EXERCISE

In another landmark case, Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2012] 1 All ER 1137, the Supreme Court took the opportunity to make abundantly clear that the construction of a contract is a “unitary exercise” (rather than a series of discrete stages) in which regard is to be had to the contract as a whole by reference to the highly sensitive factual context.

One key practical consequence of that was that no amount of over-lawyering in the contract, so that the parties could be said to have enshrined their agreement from which the court could not or should not depart, could ever properly shut out the factual context which the Supreme Court made clear is ubiquitously admissible when construing any amount of text.

The importance of this clarification of the law is of course the effect on appeals, where the jurisdictional platform of the appellate court to interfere with findings of law differs from its more limited jurisdiction to interfere with findings of fact. Given that the two are necessarily bound up as part of a unitary determination by the trial judge, what clarification do we therefore have as to how the appellate courts should go about their role?

LACKING CLARITY IN ENGLAND

In England, the position lacks clarity from the Supreme Court. With some dicta wrongly suggesting that questions of construction are solely matters of law, we have also seen some appellate courts incorrectly treating appeals as an opportunity to rehear the whole construction dispute de novo. In so doing, any appellate court will inevitably exceed its jurisdiction to interfere with the factual component of the unitary determination by the trial judge.

The matter has been dealt with head-on by the Supreme Court of Canada. Recently, in Sattva Capital Corporation v Creston Moly Corporation et al[2014] 2 SCR 633, the court confirmed that the appellate jurisdiction to review written construction cases must necessarily be limited given the legal requirement for the first instance court to reach its decision as a mixed question of law and fact. The court confirmed that an appellate court should interfere only where a mistake is made as to an “extricable question of law” or where overall the trial judge reached a completely irrational decision.

DEFER TO FINDINGS OF FACT

To date the only authority of the highest court in England is one in the context of oral contracts. Earlier this year the Supreme Court in Royal Bank of Scotland plc v Carlyle [2015] UKSC 13, [2015] All ER (D) 115 (Mar) confirmed the limited appellate role when dealing with appeals from findings of oral statements and agreements; holding that the appellate court must “defer to the findings of fact of the first instance judge unless satisfied that the judge was plainly wrong” (ie an error of law or a decision that no judge could reasonably have reached).

Thus, the idea of an appellate court substituting its own view for that of the trial judge with respect to the factual element was plainly rejected. In the usual way the factual element of the unitary analysis would need to be plainly wrong.

It follows that we are almost there in finally clarifying English law, but a case dealing with the same point as in Sattva is arguably needed to clarify the appellate role and send the required signal to the commercial and legal world that the factual content can never be completely shut out.

Graham Huntley, partner, Signature Litigation LLP and a member of London Solicitors Litigation Association (LSLA) Committee (www.lsla.co.uk)

This article was originally published in New Law Journal, and can be found here.

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