English and Scottish law to diverge?
The law of contract in Scotland has long been independent from the law in England albeit that the differences are somewhat limited. However, the differences may be about to increase. The Scottish Law Commission (“SLC”) has issued a discussion paper as part of its review of the law of contract. The paper focuses on how contracts are interpreted by the Courts and what evidence they take into account. Further details about the consultation can be found here.
The discussion paper has been prompted by the developments taking place in the European Union, where proposals are currently being considered regarding various options which might be pursued with the objective of harmonising contract law throughout Europe.
English law – a contextual approach to contract interpretation
- The present general position in English law has been summarised by Professor Gerard McMeel, a barrister and Professor of Law at the University of Bristol:
"1. The aim of the exercise of the construction of a contract is to ascertain the meaning it would convey to a reasonable business person.
2. An objective approach is to be taken, concerned with a person's expressed rather than actual intentions.
3. The exercise is a holistic one, based on the whole contract, rather than excessive focus on particular words, phrases, sentences or clauses.
4. The exercise is informed by the surrounding circumstances or external context, with it being permissible to have regard to the legal, regulatory and factual matrix constituting the background to the making of the expression being interpreted.
5. Within this framework due consideration is given to the commercial purpose of the transaction or provision”. - The current approach is sometimes known as the ‘contextual approach’ as opposed to the ‘literal approach’ of interpreting just the words used in the written contract in isolation, which approach prevailed many years ago. Whilst the contextual approach is clearly broader, it has also been emphasised however that “Judges do not easily accept that people have made linguistic mistakes, particularly in formal documents”. That is even further emphasised where the parties have used lawyers in the formation of the contract.
pre-contract negotiations – admissible or not?
- In contrast, however, evidence of the pre-contract negotiations themselves is not part of the admissible factual matrix/context and therefore not relevant to interpretation. This was re-affirmed in the Chartbrook v Persimmon case in 2009. This so called ‘exclusionary rule’ was said to be based on pragmatic grounds – to make it easier for both parties and, indeed, third parties with a potential interest (and their respective advisors) to ascertain fairly readily what contractual obligations exist and what they comprise. The exclusionary rule and the focus on the words actually used encourages, it might be argued, precision in drafting written contracts and discourages laziness.
- It is difficult to reconcile the current split approach which allows evidence of factual context but not of negotiations. The position is further complicated by the fact that there are a couple of specific exceptions to the exclusionary rule. Provided that either applies, evidence of pre-contract negotiations is admissible. The two exceptions are:
- Rectification of the contract where there has been a mistake in that the contract fails to accurately reflect what the parties agreed.
- Estoppel by convention – where there is evidence of a common assumption, each party is estopped or prevented from challenging the accuracy of that assumption.
- This latter exception is only a defence not a positive cause of action but it does prevent a party from going back on what was seemingly a shared understanding of a word or phrase used in a contract.
- Both exceptions are said to apply only in fairly exceptional cases. However, when reading decided cases it is amazing how many involve very detailed evidence/discussion of the pre-contract negotiations. This requires Judges to attempt almost impossible ‘mental gymnastics’ and exclude such evidence from their minds when interpreting the contract. Sub-consciously at least Judges must surely be swayed by having heard such evidence. The current rules therefore are very artificial. The question is are they a sham/wrong in principle and therefore in need of a statutory re-write or do they currently strike the right balance?
Scottish Law Commission proposals
- The SLC feels that a new statutory regime is necessary both due to what it perceives as current uncertainties and inconsistencies. It is also conscious of the general tide of movement in the law in this area both in continental Europe and in other jurisdictions across the world. It has therefore formulated a possible statutory rule for contract interpretation whilst at the same time asking whether evidence of pre-contract negotiations in connection with contract interpretation should continue to be excluded. The SLC seems to favour the position that evidence of pre-contract discussions should be expressly admissible in future.
- The SLC has asked for views on whether any change to the current rules will impact adversely on the costs of businesses entering into contracts and doing business generally. They also want to know whether and to what extent contracting parties should have complete freedom to opt out of the general default position which they propose. We suspect the reality is that given the opportunity to opt out, lawyers will as a matter of routine draft boilerplate clauses so that their clients opt out to the fullest extent possible which might render any change worthless.
- The SLC also wishes to investigate how the position of third parties who have reasonably placed reliance upon the written form of a contract can be protected.
contact us
We would like to hear your thoughts. If you do decide to make a submission to the SLC, please contact us as we would be interested to see what you said, albeit on a strictly confidential basis if that is what you prefer. Remember that English and Scottish law are different legal jurisdictions. We are not aware of the English Law Commission conducting a similar review. However, surely it has to make sense for the two Commissions to coordinate else we risk the law in this important area diverging? Whether such an outcome might be seen as being desirable in some parts of the United Kingdom, we will leave for others to decide.