Judges interpret contracts with reference to what a reasonable person would understand under the circumstances. Just don’t expect any help if you claim stupidity

‘Judges are not always the most commercially minded, let alone the most commercially experienced of people.”

Who would dare utter such words? Certainly not me, m’lords. I am simply quoting from the horse’s mouth. The learned Lord Justice Neuberger was the horse in question, if I might be pardoned the expression.

The case was Skanska vs Somerfield, heard last November and used by Tony Bingham to illustrate the point that a court’s interpretation of the intention behind a contract may be something of a lottery (19 January, page 66). A valid point.

Lord Neuberger’s point is interesting, too. He clarified that, although the terms of a contract may need to be construed using common sense, that doesn’t give the courts a licence to rewrite them because they appear unexpected, unreasonable or unwise.

In the case, a letter of intent imposed a temporary arrangement that differed from the parties’ long-term intentions. The Court of Appeal decided there was no valid reason to interpret the letter in alternative terms to those on the face of it simply because it might appear commercially more logical to have similar short and long-term arrangements. So, for better or worse, the law leaves us free to make deals of questionable wisdom to our hearts’ content.

The courts are having a run of cases concerning the interpretation of ambiguous contract terms. Last April, Westerngeco vs ATP Oil and Gas UK clarified that even if a particular clause were negotiated separately to the rest of a contract, its intention should still be ascertained by viewing the contract as a whole. There, the clause stated that the client would indemnify the contractor in the event of “any liability whatsoever under this contract” that exceeded the contractor’s total remuneration on the job.

The courts do not have a licence to rewrite clauses because they appear unreasonable or unwise

Read literally and independently, that clause could be interpreted to mean the client should indemnify the contractor even in respect of the contractor’s liability to third parties, which was a point specifically addressed by the contract. However, looking at the contract as a whole, which included an obligation for the defendant to insure against liability to third parties, the court determined that the words “liability under this contract” must be intended to refer only to liability to the client.

Another case worth noting is Maggs vs Marsh, last summer. Generally, a party’s conduct after a contract is formed is not relevant to interpreting its intention when entering into it. However, with all the evidential hurdles that oral contracts present, the courts allow a little more leeway.

Marsh and Maggs agreed a figure for a house refurbishment. Extras were then ordered without agreed prices, resulting in a final bill of double the original estimate – and the inevitable dispute.

The pre-trial procedure, aimed at narrowing differences, presumably could have gone rather better, as the bill almost doubled again after that particular exercise. Evidence of crucial pricing discussions was deemed admissible to determine the agreed terms, even though they took place after the contract was concluded. It was confirmed that the courts may allow themselves to bend the rules in this way in the case of oral contracts.

One final point, which is often misunderstood: when the courts interpret the understanding of the parties when they entered the contract, they look at the interpretation that a reasonable person would have in such circumstances. The court may stand by your side if you reasonably misunderstood the terms, but if you’re just plain daft, you’re on your own. The law is often cited as being an ass. That may occasionally be true but don’t make the mistake of thinking it will protect its fellow kind.