Once the fundamental change that has come over the law on construction of contracts since the observations of Lord Wilberforce in Prenn v. Simmonds Footnote 1 and Reardon Smith v. Yngvar Hansen-Tangen Footnote 2 had been sufficiently appreciated,Footnote 3 “construction” and rectification, the two weapons available to the courts to deal with written agreements that do not reflect the contract that the parties intended to make, have lived in uneasy parallel with each other. Although the two institutions serve the same forensic purpose they purport to perform quite different tasks, the most striking difference between them being that evidence of prior negotiations is inadmissible when the disappointed party seeks to construe the defective document in terms different from those stated on its face; but such evidence is admissible, indeed has been seen as the most relevant evidence of all,Footnote 4 when the disappointed party, not having succeeded in having the document construed to his liking, seeks instead to have the document rectified by the court.
The strict rule of inadmissibility of evidence of prior negotiations when construing a written contract produces a practical paradox, because when the contractual writing is disputed all but the most negligent of counsel will have pleaded rectification of the writing as well as the construction of the writing that best suits his clients' interests; and therefore the evidence forbidden in the exercise of construction will be before the court in any event. The court, in construing a document in any particular case, can be expected to note that evidence but then put it out of its mind.Footnote 5 But the concurrent existence of a set of inconsistent rules calls for reflection on two separate branches of contractual jurisprudence that however coexist in most cases. That can be best done in the context of the most recent and authoritative survey of both construction and rectification, by the House of Lords in Chartbrook. Before that, however, something more must be said about the underlying law of construction and of rectification.
Construction: the Hoffmann principles
Rarely has what was presented as merely a statement of orthodox doctrineFootnote 6 so completely captured an area of the law as have Lord Hoffmann's five principles set out in ICS.Footnote 7 The author of a magisterial work on construction of contracts speaks only partly ironically when, having introduced the Hoffmann principles, he suggests that the lazy reader may stop there.Footnote 8 However, the passage of twelve years, and the stimulus of further guidance from Lord Hoffmann himself in Chartbrook, justifies some further analysis of the basic text.
The controverted question of whether ICS introduced anything new into the lawFootnote 9 can be resolved as follows. Apart possibly from some overstatement in the requirement in principle 2 that “absolutely anything” affecting the understanding of the reasonable man must be taken into account, the first three of the principles are indeed a statement of the orthodox approach to construction, as set out previously by Lord Wilberforce, that the meaning of a document is what it would convey to an objective observer looking at the document against the matrix of fact in which the parties agreed that document. Thus, where there was doubt as to whose “profits” an agreement was referring to, the matrix of fact showed that what was meant was the consolidated profits of the group, and not just the profits of the parent company;Footnote 10 and the matrix of fact (including, especially, other terms of the contract) showed that a reference in a shipbuilding contract to “Yard 354” was merely a means of identifying the vessel in question, and not part of the description of the goods.Footnote 11 It is in the second part of principle 4, and in principle 5, that a new approach is introduced.Footnote 12
Although anyone sufficiently interested in the subject to look at this article will be able to recite those principles off by heart, they are not susceptible of easy summary, and it will be prudent to set them out verbatim:
(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 a 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 meaning 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] A.C. 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.Footnote 13
And Chartbrook underlines the particular nature of the fifth ICS principle. The condition for diverting from the natural and ordinary meaning, that something must have gone wrong with the language, is singled out as an explanation of the jurisprudence of ICS in paragraph 14 of the speeches in Chartbrook, and is reverted to in paragraph 25, where it is said that all that is required for verbal rearrangement or correction 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.
That formulation, we may think, would have come as a surprise to Lord Wilberforce, at least if seriously suggested as justified by the two cases of his that are cited in its support. Whatever the nature of the process in ICS, it is clear that it is not one of construing the meaning of the document. Take the two leading examples of the process referred to in paragraph 21 of Chartbrook. “13th January” does not mean 12th January [Mannai Investment v. Eagle Star Footnote 14 ]; and, however roughly its analysis was subsequently handled by the House of Lords, the Court of Appeal was, with respect, clearly right in ICS itself to say that “any claim (whether sounding in rescission for undue influence or otherwise)” does not mean any claim sounding in rescission (whether for undue influence or otherwise).Footnote 15 That objection is sought to be met by saying, at the start of ICS principle 4, that the meaning of a document is not the meaning of its words, but what the parties using those words would reasonably have been understood to mean. But that is plainly not so. The whole point of drawing up a document, and in particular a contractual agreement, is so that the legally binding obligation of the parties can be found in that document; which being a document can only speak through the words used in it. When something has gone wrong with the language used in the document, that shows that the parties did not succeed in giving the document the meaning that they intended. That meaning may be found elsewhere but, precisely because the language of the document that purports to express that meaning has gone wrong, it cannot be found in the document.
Principle 5 was thus revolutionary because it overrode the previous understanding that, rectification apart, the court could not depart from the words of the document to find an agreement different from that stated in the document. That understanding was shortly expressed by Lord Simon of Glaisdale in L. Schuler A.G.v. Wickman Machine Tools Footnote 16:
[The general principle of law] has been frequently stated, but it is most pungently expressed in Norton on Deeds (1906), p. 43, though it applies to all written instruments:
‘…the question to be answered always is, ‘What is the meaning of what the parties have said?’ not ‘What did the parties mean to say?’…it being a presumption juris et de jure…that the parties intended to say that which they have said.'
It is, of course, always open to a party to claim rectification of an instrument which has failed to express the common intention of the parties; but, so long as the instrument remains unrectified, the rule of construction is as stated by Norton. It is, indeed, the only workable rule.
Principle 5 in ICS starkly departs from that guidance, by confusing the meaning of what the parties said in their document with what they meant to say but did not say; and substitutes for the meaning of the document an intention of the parties that was not manifested in or by the document. Accordingly, when principle 5 of ICS is applied the necessary albeit unstated assumption is that the parties had reached a consensus which they then, either out of choice or because the law requires them to do so, expressed in a written document. It is that document that was and was intended to be “the agreement” between them; but, because something has gone wrong with the language of the document the agreement that it contains does not reflect the parties' consensus. ICS addresses that difficulty by reading the agreement so that it does reflect the consensus, but with the agreement as so construed remaining the instrument that binds the parties. But in reality, even though not in form, what is thereafter enforced is the original consensus, and not the written agreement that purported, wrongly, to set out that consensus.
So to say is of course heretical. Contract lawyers think it necessary to assert, however implausibly, that the process is of construction of the written agreement rather than enforcement of the, different, preceding consensus: first, because the document is where the parties have decided their agreement is to be found; and second, in some cases the law in any event requires construction of the document, because either the vestiges of the parole evidence ruleFootnote 17 or statutory provisions such as the Law of Property (Miscellaneous Provisions) Act 1989 say that a written agreement, but nothing else, is enforceable.
The dependence of the ICS jurisprudence on elucidation and then enforcement of a prior consensus does, however, underline the very close relationship of the effect, even if not of the form, of that jurisprudence to the institution of rectification.
Rectification: the objective test
Recent editions of Chitty Footnote 18 have set out as the essence of rectification a statement by an uncommonly distinguished constitution of the Court of AppealFootnote 19 in The Nai Genova:Footnote 20
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.
A closer expression of the process necessarily envisaged by principle 5 of ICS could scarcely be found. And Chartbrook underlines that commonality. At first instance and in the Court of Appeal the case was argued on the basis that for rectification the written agreement had to be erroneous in failing to reflect what both parties believed their prior consensus to have been. But in the House of Lords the appellants, encouraged by an article by Mr Marcus Smith,Footnote 21 argued that
Rectification required a mistake about whether the written instrument correctly reflected the prior consensus, not whether it accorded with what the party in question believed that consensus to have been. In accordance with the general approach of English law, the terms of the prior consensus were what a reasonable observer would have understood them to be and not what one of the parties believed them to be.Footnote 22
Since the House found in favour of the appellants in any event on the “construction” issue, there was no need to go on to consider rectification; and the point taken by the appellants on rectification was, as we have seen, first raised in the House of Lords. Neither of those considerations deterred the House from entering upon the argument, and holding that the law is as stated in the passage set out above.
When the reasonable observer is looking at the prior consensus not for the purpose of rectifying the subsequent written agreement but for the purpose of concluding that something must have gone wrong with the language of the subsequent written agreement he will in the latter case also be considering that consensus objectively understood. The one element that might have been thought to be missing from a complete overlap of ICS construction and rectification was thus authoritatively put in place by Chartbrook.
Evidence of previous negotiations
The issue in Chartbrook that was seen as most important by the court and by commentators was the reconsideration of the long-standing rule, recognised in ICS itself, that in issues of construction evidence of prior negotiations is inadmissible. To the disappointment of at least some,Footnote 23 the House confirmed the exclusionary rule, and in strong terms. The reasons given for that conclusion require some further comment.
It might be thought irrational that what would seem to be the most cogent indication of what the document was intended to say is excluded from the obligation, imposed by principle 2 of ICS, to take into account absolutely anything that affects the way in which the language of the document would have been understood by a reasonable man. Principle 3 of ICS rationalises the contradiction between principle 2 and the rule excluding consideration of prior negotiations as follows:
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.
Practical policy, fear of courts being overwhelmed by masses of irrelevant evidence, never seemed a convincing reason for making a special exception for evidence of prior negotiations. As Lord Nicholls of Birkenhead has pointed out,Footnote 24 in deciding other questions affecting commercial contracts, including the authority of the parties, estoppels, misrepresentation, and not least rectification, judges are already invited to read page after page of turgid pre-contract correspondence, a process that they may be expected to keep under control by proper case management. Accordingly, while practicality is still stressed in Chartbrook, emphasis is also placed on the need to uphold the English objective theory of contractual interpretation.Footnote 25 Lord Hoffmann explained the point as follows:
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 or 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.Footnote 26
The practicalities of that objection may be thought to take a pessimistic view of the perception and case-management abilities of the judiciary, which Lord Nicholls of Birkenhead had seen as the means of avoiding uncertainty and chaos.Footnote 27 But a general and more fundamental objection raised by Lord Hoffmann is that statements in pre-contractual negotiations will be “drenched in subjectivity”, so that to look at them will undermine the court's obligation to construe the contract, and its background, in terms of the objective perception of the reasonable observer. That statement of the law, and for that reason, raises striking issues when one compares construction with rectification.
Construction and rectification: the future
Two issues stand out. First, although the process of construction under principle 5 of ICS is structurally the same as that of rectification, and addresses the same problem of mistaken or incompetent drafting, evidence of previous negotiations is admitted in rectification, but excluded, in carefully argued terms, in construction. No explanation or justification is advanced for this dissonance, either in Chartbrook or elsewhere, and the present writer has not succeeded in thinking of any. Second, whilst Chartbrook establishes that the prior consensus in an issue of rectification must be judged objectively, the case assumes that evidence of prior negotiations will continue to be admitted to determine that issue, although that evidence is seen as inherently subjective in nature, and for that reason excluded from principle 5 construction.
Baroness Hale of Richmond was the only member of the House to address the latter inconsistency. She suggested that what would be helpful in rectification was not evidence of prior negotiations, but only evidence of an objectively ascertained consensus achieved after those negotiations.Footnote 28 This solution, elegant as it is, was not the subject of any discussion either in argument or in the other speeches, and there are a series of difficulties about it. First, it makes it even more difficult to reconcile the law of rectification with the absolute ban on the admission of any evidence about either the course or the outcome of prior negotiations that is imposed by ICS and upheld in Chartbrook. Second, if Lord Hoffmann were right about the difficulty of distinguishing between expressions of aspiration and objective consensusFootnote 29 it would only be in a very few cases that the solution could be confidently adopted. Third, and more fundamentally, by limiting admissibility to the identification of consensus the solution effectively abolishes the rule that evidence of prior negotiations is admissible. That is because the enquiry in rectification is directed at finding whether there was a “true agreement”, as we now know from Chartbrook to be objectively ascertained, in advance of the written document.Footnote 30 If all that the court can look at is the fact that that outcome was fulfilled, the negotiations leading to that outcome are necessarily excluded.
Much is thus left in the air, not only with regard to the relationship between construction and rectification, but also within the jurisprudence of rectification itself. These serious questions were left unaddressed at least partly because the approach to rectification adopted by the House of Lords only came into the case at that level. The issue was no doubt fully and skilfully argued by counsel instructed before the House,Footnote 31 but to permit the introduction of fundamental issues only in the final tribunal deprives both the House and the advocates appearing before it of the benefit of the wisdom of the Court of Appeal, and of the reflection, professional as well as academic, on the wider implications of any change in the law that a judgment of that court may be expected to provoke. And, in particular, collateral but important issues, such as the overlap with construction and the rationale of the prior negotiation rule in rectification, are likely to go unconsidered when the case is concentrated on a discrete question abstracted from the law as a whole.Footnote 32
Chartbrook would appear as a matter of form or theory to have settled the issue of the admissibility of evidence of prior negotiations in questions of construction, perhaps for something like the next thirty years.Footnote 33 However, the law in practice may turn out to produce a somewhat different effect. Although ICS continues to attract some advocates as a comfortable alternative to close analysis of the actual agreement, once the limits of principle 5, stressed in Chartbrook,Footnote 34 are recognised, it can be seen as occupying no ground distinct from that of rectification; but with the handicap, not enjoyed by rectification, that evidence of prior negotiations is not admissible. Accordingly, in cases that fall within the structure of principle 5 practitioners, and courts, are likely to find it more sensible to move directly to rectification. That should have the beneficial effect of focussing early attention on the issue left open by the House of Lords of what exactly is to be understood by “prior negotiations” in rectification. If that proves to carry the meaning that was favoured by Baroness Hale of RichmondFootnote 35 rectification may come to be a somewhat different exercise from that which is presently understood. However, on any view of its reach rectification should in practice transcend its present status as a safety netFootnote 36 in cases where the inadmissibility of prior negotiations in issues of construction produces a conclusion that those negotiations show to be plainly wrong. Rectification should in future occupy the whole of the field when it is necessary to correct errors in the formal expression of a contractual consensus.
